State Pensions $4 Billion Short
State Budget Solutions Puts Public Pension Debt Higher—Staggering $8.8 Billion
BY PHIL DRAKE
A new report on state pensions and elderly health care expresses “serious concerns” when it comes to Montana’s fiscal condition.
The Pew Center on the States reported Monday that from Fiscal Year 2009 to FY 2010, the gap between states’ assets and their obligations increased 9 percent to $1.38 trillion. Of that, $757 billion was for pension obligations and $627 billion was for retiree health care.
The report warns that although states have enough money to cover the retiree benefits in the short term, many will not be able to pay in the long run without more money from taxpayers and employees, deep cuts to benefits and changes to how retirement plans are structured. Pew researchers note experts say pensions systems should be at least 80 percent funded.
Montana has about $11 billion in liability and is about 70 percent funded, according to the Pew study.
FY 2010 is the latest budget year for which complete numbers are available.
In 2000, more than half the states were 100 percent funded. In 2010, Wisconsin was the only state that held that distinction. Thirty-four states were below 80 percent in 2010, an increase from 31 in 2009 and 22 in 2008, Pew reported.
North Carolina, South Dakota, Washington, and Wisconsin were funded at 95 percent or better.
Ranked worst were: Connecticut, Illinois, Kentucky, and Rhode Island, which were all funded under 55 percent.
The report found states have not set aside enough money for retirees’ health care and other non-pension benefits, such as life insurance. As of FY 2010, they had put away 5 percent of their total bill due for those benefits. Seventeen states had not money put aside and seven states had funded at least 25 percent. Alaska and Arizona had nearly 50 percent of their health care liabilities covered with assets.
The Pew report noted that the Great Recession was a main reason for losses in pension fund investments. But it also claimed that the same recession did not cause the public sector retirement crisis. Early in the decade many states increased pension liabilities by increasing employee benefits.
Pew rated 11 states as “solid performers” in managing pension obligations, meaning the states were 90 percent funded.
Pension ratings were based on being above 80 percent funded (two points), having an unfunded liability less than the payroll for active members (one point), and paying at least 90 percent of the recommended pension contribution for the last five years (one point). Four points were solid performers, two or three points meant the plans needed improvement and plans with one or no points had cause for serious concern.
Retiree health benefits ratings were based on whether a state’s benefits had a funding level above the 8 percent national average (one point), whether 90 percent of the recommended contribution was made in the recent year (one point) and if the states’ plans were better funded based on the most recent data than they were in the prior year.
Pension reform appears to be one of the hot topics facing Montana lawmakers in the 2013 session. Several proposals are on the table, including one by the governor.
Montana has assets of $7.6 billion in its pension system, as of June 30, 2011; it also has $3.9 billion in unfunded liability, according to the state Legislature pension information website.
Members of the state Legislature’s State Administration and Veterans Affairs and the Legislative Finance committees were told last month that four of the eight plans administered by the Public Employee Retirement Board are actuarially sound, four are not. Another program, the Teachers’ Retirement System, has a $1.8 billion unfunded liability. A state report noted the systems are now “significantly” underfunded.
In April, Gov. Brian Schweitzer said he would propose legislation that would “fix” Montana’s unfunded pension liabilities, saying it could be achieved without tax increases and give the system a surplus by 2021.
For the TRS, he proposed taking $25 million from the state land guarantee account for natural resource development, a $14.7 million one-time only contribution from the employer, and a 1 percent increased employee contribution and benefit change.
For the PERS, he proposed an $18.1 million state contribution and more local government contribution, a 1 percent increase employer and employee contribution.
Bob Williams, president of State Budget Solutions, told Montana Watchdog via e-mail the situation will worsen unless Montana officials impose drastic reform. His organization estimates Montana’s pension debt at $8.8 billion. Williams said SBS used market-based accounting rather than government accounting, which assumes artificial rates of return.
He said the best-case scenario right now is that without major reform the unfunded pension liability will cost the average Montana household $826 in additional taxes every year for 30 years, according to a study last month for the National Bureau of Economic Research.
SBS describes itself as a non-partisan organization that offers information about coming fiscal and economic disasters and reforms to avoid them.
The Pew Center on the States is a division of The Pew Charitable Trusts, a nonprofit organization that offers solutions to critical issues facing states.
- Montana Watchdog