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States' Pension Woes Worsening

Written By: Bob Adelmann  |  Posted: Saturday, May 14th, 2011

            The latest study by The Pew Center on the States shows not only that states have not funded the promises they made to their employees when they retire, but that the gap between those promises and the states' contributions to pay for those promises is widening.

            According to Pew, the shortfall is at least $1.26 trillion (with a t), but could approach $5 trillion depending upon rate of return assumptions. Because of the precipitous decline in revenues in 2009, states were able to pay only $73 billion into their plans when their actuaries said they needed to contribute $115 billion. In 2008, states made contributions of $72 billion, when they needed to contribute $108 billion. So while states continue to underfund their pension plans, the shortfall is growing more quickly than they can contribute.
            Actuaries and other pension experts recommend that states fund at least 80 percent of their future liabilities. Anything less than that puts their ability to keep those promises at serious risk. Pew says that on the average, across all the states, their pensions are funded at only 78 percent. And 31 states fall well below the 80 percent safety threshold.  
            A closer look at the study indicates that while the pension funds are in awful shape, promises to pay healthcare benefits to retirees are much worse. Pew calculates that the states have promised to provide $635 billion of benefits in the future, but have put aside only $31 billion to pay them. Nineteen states have put aside nothing, and are just paying out healthcare benefits from their general funds on a day-by-day basis. This is called "pay as you go," which, translated, means "we stop paying when we run out of money." 
            Perhaps Pew's most important conclusion is that pension and healthcare obligations are simply running away from the states' abilities to pay them. In 2000, for instance, states had to pay just $27 billion to fund fully their promises. In 2009, that requirement grew to $68 billion, an increase of 152 percent in just nine years.  
            Some states are beginning to address the issue, albeit in a very gingerly manner, and meeting great resistance. Massachusetts, for instance, has funded only 68 percent of its pension liabilities, and was able to make only 66 percent of the recommended minimum payment this year. Surprisingly, given the perception that Massachusetts is highly Democratic and heavily influenced by unions, lawmakers in the state House voted earlier this week to remove from the unions their power to negotiate over their healthcare benefits. According to House Speaker Robert A. DeLeo, if the measure passes the Senate, the state will save $100 million: "By spending less on the health care costs of municipal employees, our cities and towns will be able to retain jobs and allot more funding to necessary services like education and public safety." The unions, however, are not going quietly into the night. As Robert J. Haynes, president of the Massachusetts AFL-CIO exclaimed,

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