One of the primary drivers of pension shortfall is insufficient employer contributions. States have varying contribution policies that affect how much regional public employers are required to contribute to pension funds, but in hard economic times, states use the funds meant for pension contributions in hopes they could make up the difference in times of economic growth. States with responsible contribution policies tend to meet their contribution benchmarks, while states with worse policies often fail to meet them. In 2017, a year with strong economic growth, only 17 states met their employer contribution benchmarks.
Overgenerous benefits can also contribute to underfunded pensions. With greater benefits promised, pension obligations rise, leading states to either raise taxes or reduce services to meet them. In nine of the 10 states with the largest pension funding gaps, the average annual retirement benefits are greater than the $21,804 national average.
Historically, one of the largest drivers of pension funding shortfall has been poor market performance. While in 2017 the typical state pension plan had a 13.0% return on investment — greater than the median assumed return of 7.2% — in other years returns have fallen far below actuarial forecasts. In 2016, for example, the median rate of return on public pension plan funds was just 1.0%, far below the assumed rate of 7.5%.
To rank the severity of each state’s pension crisis, 24/7 Wall St. reviewed the average pension funding ratio — the market value of a pension fund as a share of the total benefits owed to current or retired public employees — for all 50 states as of 2017 with data from nongovernmental organization The Pew Charitable Trusts. Data on the total pension shortfall also came from Pew and is for 2017. Data on the average annual benefits payout per public retiree came from the research nonprofit National Institute on Retirement Security and figures are for 2016. Data on the share of the workforce employed in state and local government is from the Bureau of Labor Statistics for 2018.