Special Report

Nine States with Sinking Pensions

Several years after from the financial crisis of 2008, state pension funds continue to languish. According to data released this week by Milliman, Inc. and by the Pew Center on the States, there was a $859 billion gap between the obligations of the country’s 100 largest public pension plans and the funding of these pensions. Most of these are state funds, and state legislatures have attempted to respond to this growing crisis by making numerous reforms to try to combat this growing deficit.

Read: Nine States with Sinking Pensions

In 2010, only Wisconsin’s pension funds were fully funded. Nine states, meanwhile, were 60% funded or less — this would mean that at least 40% of the amount the state owes current and future retirees is not in the state’s coffers. In Illinois, just 45% of the state’s pension liabilities were funded. In some of these states, the gap between the outstanding liability and the amount funded was in the tens of billions of dollars. California alone had $113 billion in unfunded liability. Based on Pew’s report, “The Widening Gap Update,” 24/7 Wall St. identified the nine states with sinking pensions.

Each year, actuaries determine how much a state should contribute to its pensions to keep them funded. Many states, for various reasons, did not pay the full recommended contributions for 2010, while others have been paying the recommended amount for years. In an interview with 24/7 Wall St., Milliman Inc. principal and consulting actuary Becky Sielman explained that despite states making the recommended payments, many large individual public retirement funds are still underfunded.

Of the nine states with pensions that are underfunded by 40% or more, three paid more than 90% of the recommended contributions, and two, Rhode Island and New Hampshire, paid the full amount. Despite this, pension contributions were still generally higher in states that were better funded. Of the 16 states that were at least 80% funded — a level experts consider to be fiscally responsible — 11 contributed at least 97% of the recommended amount.

In an interview with 24/7 Wall St., Pew Center on the States senior researcher David Draine explained why, despite paying the full amount, several states continued to be severely underfunded. He pointed out that meeting contributions was important. He added that states that made full contributions in 2010 were 84% funded on average, compared to those that did not, which were only 72% funded.

To explain why several states that are making full contributions are still underfunded, Draine said much of it has to do with investment losses. “The 2000s have been a terrible period for pension investments that have fallen short of their expectations … that’s a big part of the growth in the funding gap.”

Unfunded liability can also grow due to overly optimistic assumptions about investment growth, pension payments that become deferred, and an increase in benefits or an increase in the number of beneficiaries without a corresponding increase in contributions, Draine explained.

Based on the Pew Center for the States report, “The Widening Gap Update,” 24/7 Wall St. identified the nine states with public pensions that were 60% or less funded as of 2010. From the report, we considered the total outstanding liability, the total amount funded, and the proportion of the recommended contribution each state made in 2010. We also reviewed the level of funding for the 100 largest pension funds in each state, provided by Milliman’s Public Pension Fund Study, which covered a period from June 30, 2009, to January 1, 2011.
Nine States with Pensions That Are Sinking

9. Alaska
> Pct. liability funded:
> Total liability: $16.6 billion (13th smallest)
> Total funded: $10.0 billion (12th smallest)
> S&P credit rating: AAA

Alaska has only fully funded its pension twice between 2005 and 2010, which allowed the funding gap to increase to more than $6 billion by 2010. The pension system faced a $6.6 billion deficit, or 40% of total pension liability. Alaska has in recent years tried to wean employees off of traditional pensions. In 2006, Alaska became one of just two states to offer new employees a defined-contribution plan similar to a 401(k). But there remains nearly five employees with a pension plan for every one employee with a defined-contribution plan. The state’s largest retirement program, the State of Alaska Public Employees’ Retirement System, has accrued nearly $10.4 billion in liabilities, or $176,000 for every active or retired employee.

8. New Hampshire
> Pct. liability funded:
> Total liability: $9.0 billion (6th smallest)
> Total funded: $5.3 billion (3rd smallest)
> S&P credit rating: AA

Between 2005 and 2010 the state has been unable to meet the recommended levels of contributions twice. Although it reached its targets in 2010, in recent years New Hampshire has cut benefits, increased required contributions by plan members and raised the retirement age for new employees from 60 to 65. According to Milliman, the New Hampshire Retirement System was in the worst quartile among publicly funded major pension programs for the amount of liabilities that were unfunded. As of last year, just 36.5% of plan members — one of the lowest percentages in the country — were retired or inactive, meaning that most of the fund’s liabilities were from state employees still paying into the program.

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7. West Virginia
> Pct. liability funded: 58%
> Total liability: $15.0 billion (12th smallest)
> Total funded: $8.7 billion (10th smallest)
> S&P credit rating: AA

The largest pension system in the state, the West Virginia Teacher’s Retirement System, is not even funding half of its annual pension obligations as of June 2011. The pension has accrued about $8.9 billion in liabilities. Pew notes that West Virginia lawmakers approved benefit cuts in 2011 by reconfiguring how final salaries are calculated. More cuts could be on the way. The state legislature is currently debating a proposal that would raise the retirement age to 62 from 60 and would require state employees to contribute 6% of their pay to the pension, up from 4.5%.

6. Oklahoma
> Pct. liability funded: 56%
> Total liability:
$36.4 billion (23rd smallest)
> Total funded: $20.4 billion (18th smallest)
> S&P credit rating: AA+

According to Pew, from 2005 to 2010 Oklahoma regularly did not pay its full annual recommended contribution. In 2010, Oklahoma contributed only 70% of the recommended $1.5 billion. Overall, $16 billion in state public pension liabilities were unfunded as of 2010. In an attempt to lower the gap, Oklahoma raised the retirement age from 62 to 65 and also reduced benefit increases associated with the rising cost of living for retirees last year. Two of the largest 100 pension funds in the nation are in Oklahoma, the Teachers’ Retirement System of Oklahoma and the Oklahoma Public Employees Retirement System.

5. Louisiana
> Pct. liability funded:
> 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

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