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CCH® PENSION — 03/04/10

More Than Half Of State Retiree Funding Shortfalls Are In Health And Welfare Plans

from Spencer’s Benefits Reports: “Some states have been disciplined about paying for their [retirement benefit] policy choices and promises on an ongoing basis. But for those that have not, the financial pressure builds each year,” according to a recent report on underfunded state retirement systems from the Pew Center On The States.

The report, The Trillion Dollar Gap, notes that the $1 trillion gap is “what exists between the $3.35 trillion in pension, health care, and other retirement benefits states have promised their current and retired workers as of fiscal year 2008 and the $2.35 trillion they have on hand to pay for them.”

More than half of the underfunding is due to shortfalls in states’ health and other non-retirement systems.

Pensions

In fiscal year 2008, states’ pension plans had $2.8 trillion in long-term liabilities, with more than $2.3 trillion in assets to cover those costs.

In aggregate, states’ systems were 84% funded. (According to Pew, “most experts advise at least an 80% funding level.”) The unfunded portion is almost $452 billion, and states’ overall performance was down slightly from an 85% combined funding level, against a $2.3 trillion total liability, in fiscal year 2006.

Some states are doing a far better job than others of managing their retirement systems. In 2000, slightly more than half the states had fully funded pension systems. By 2006, that number had shrunk to six states. By 2008, only four states had fully funded pensions: Florida, New York, Washington, and Wisconsin.

While only 19 states had funding levels below the 80% mark in fiscal year 2006, 21 states were funded below that level in 2008. In eight states—Connecticut, Illinois, Kansas, Kentucky, Massachusetts, Oklahoma, Rhode Island, and West Virginia—more than one-third of the total liability was unfunded. Illinois and Kansas had less than 60% of the necessary assets on hand to meet their long-term pension obligations. Illinois was in the worst shape of any state, with a funding level of 54% and an unfunded liability of more than $54 billion.

Health Care, Other Non-Pension Benefits

Retiree health care and other non-pension benefits created another huge bill coming due, according to Pew: a $587 billion total liability to pay for current and future benefits, with only $32 billion, or just over 5% of the total cost, funded as of fiscal year 2008. Half of the states account for 95% of the liabilities.

In general, states continued to fund retiree health care and other non-pension benefits on a pay-as-you-go basis—paying medical costs or premiums as they are incurred by current retirees. For states offering minimal benefits, this may cause little problem. But for those that have made significant promises, the future fiscal burden will be enormous.

Only two states, Alaska and Arizona, had more than 50% of the assets needed to meet their liabilities for retiree health care or other non-pension benefits. Four states contributed their entire actuarially-required contribution for non-pension benefits in 2008: Alaska, Arizona, Maine, and North Dakota.

Both health care costs and the number of retirees are growing substantially each year, so the price tag escalates far more quickly than average expenditures, says the report. States paid $15 billion for non-pension benefits in 2008. If they had set aside funding to pay for these long-term benefits on an actuarially sound basis, the total payments would have been $43 billion.

For more information, visit http://www.pewcenteronthestates.org/.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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