5. Louisiana
> Pct. liability funded: 56%
> Total liability: $41.4 billion (25th largest)
> Total funded: $23.2 billion (23rd smallest)
> S&P credit rating: AA
In 2010, Louisiana faced an $18 billion funding gap in its public pension system. Lawmakers are not blind to the problem — the Louisiana legislature approved pension reform in both 2009 and 2010, which included higher employee contributions and limits on cost-of-living increases. The legislature passed more pension reform in 2012, which would move new government employees onto a 401(k)-style plan. But the law, scheduled to take effect in July 2013, has been challenged by the Retired State Employees Association and others on the grounds that two-thirds of the legislature, rather than just a simple majority, must approve the pension changes.
4. Kentucky
> Pct. liability funded: 54%
> Total liability: $37.0 billion (24th smallest)
> Total funded: $20.0 billion (17th smallest)
> S&P credit rating: AA-
Since 2005, Kentucky has repeatedly failed to pay its entire annual recommended pension contribution. In 2010, Kentucky funded just 58% of its recommended contribution of $1 billion. Only four other states failed to contribute less than 60% of their recommended amounts. Overall, the state’s pension program is just 54% funded, and it has nearly $20 billion in unfunded obligations. In a study in August, Pew warned that required contributions for Kentucky’s pension system could nearly quadruple by 2031. It cited a declining stock market, employer contribution shortfalls and incorrect assumptions by actuaries among the reasons for the state’s funding gap.
3. Connecticut
> Pct. liability funded: 53%
> Total liability: $44.8 billion (22nd largest)
> Total funded: $23.8 billion (24th smallest)
> S&P credit rating: AA
Connecticut has fallen short of paying its full annual pension payout three times between 2005 and 2010, and just over half of its liabilities were funded. In 2011, state unions agreed to concessions worth $1.6 billion, including changes to pensions, to avoid widespread layoffs. Some of the concession the unions agreed to, among others, were raising the retirement age by three years for those who retire after 2017 and increasing the penalty for employees who retire early. Despite the changes, Moody’s Investor Services downgraded the state’s credit rating from Aa3 to Aa2. The downgrade was partially due to unsustainably high retirement costs and “pension funded ratios that are among the lowest in the country.”
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2. Rhode Island
> Pct. liability funded: 49%
> Total liability: $13.4 billion (10th smallest)
> Total funded: $6.6 billion (4th smallest)
> S&P credit rating: AA
Although Rhode Island paid the entirety of its recommended contribution in 2010 and had consistently paid its full contributions for several years, the state’s public pension system was still just 49% funded. Facing a funding gap of nearly $7 billion, Rhode Island was forced to make difficult changes to its pension system. According to Pew, in 2011 Rhode Island transformed its plans into a hybrid pension and 401(k)-like plan. The state also raised the retirement age from 62 to 67 and limited cost-of-living increases. The total savings from these reforms were estimated to reach $3 billion. Although union lawsuits to block the plan are still ongoing, the state’s Treasurer, Gina Raimondo, told the Associated Press that “Rhode Island is leading the way. I expect others to follow, frankly because they have to.”
1. Illinois
> Pct. liability funded: 45%
> Total liability: $138.8 billion (6th largest)
> Total funded: $62.5 billion (11th largest)
> S&P credit rating: A+
Illinois has not completely funded its full annual pension contribution in any year between 2005 and 2010. Just 45% of the state’s pension liabilities were funded in 2010. The underfunding, however, has not led to major overhauls. Over the past year, Illinois governor Pat Quinn has called for an increase in the retirement age from 65 to 67, a three-percentage-point increase in employee contributions, and reduced cost-of-living increases. But intense opposition from state labor unions has stalled the legislation. Standard & Poor’s cut the state’s credit rating in August from A+ to A, pointing to a “lack of action” in tackling the state pension system’s massive unfunded liability. Moody’s Investor Service downgraded the state earlier in the year and warned that further downgrades are possible if no action on pensions is taken.
-Michael B. Sauter, Alexander E.M. Hess and Samuel Weigley
