Of all of the bills coming due to states, perhaps the most daunting is the cost of pensions, health care and other retirement benefits promised to their public sector employees. An analysis by the Pew Center on the States found that at the end of fiscal year 2008, there was a $1 trillion gap between the $2.35 trillion states and participating localities had set aside to pay for employees' retirement benefits and the $3.35 trillion price tag of those promises.
To a significant degree, the $1 trillion gap reflects states' own policy choices and lack of discipline: failing to make annual payments for pension systems at the levels recommended by their own actuaries; expanding b
enefits and offering cost-of-living increases without fully considering their long-term price tag or determining how to pay for them; and providing retiree health care benefits without adequately funding them.
Pew's analysis shows that in fiscal year 2008, states' pension plans had $2.8 trillion in long-term liabilities. Total liabilities have grown over $323 billion since 2006, outpacing asset growth by more than $87 billion. Pew found that, in the aggregate, states’ systems in fiscal year 2008 were 84 percent funded. This is relatively good news: Many experts in the field, including the U.S. Government Accountability Office, suggest that a healthy system is one that is at least 80 percent funded. However, this is slightly down from an 85 percent funding level in fiscal year 2006. The actual shortfall, almost $452 billion, is substantial.
But pensions are just one side of the problem. Retiree health care and other non-pension benefits represent the other half of the challenge facing states: a $587 billion long-term liability, with just over five percent of that amount, or almost $32 billion, funded as of fiscal year 2008. Pew found that only two states have more than 50 percent of the assets needed to meet their liabilities for retiree medical or other non-pension benefits: Alaska and Arizona. Twenty-eight states have less than one percent of their liabilities funded, and twenty states have not set aside any funds.
The states that are meeting their commitments have demonstrated that public sector retirement benefits can be adequately funded during good and bad times, with care taken to identify the long-term costs of short-term decisions. Due to mounting financial pressures, other states have been on an unsustainable course and will be forced to make tough choices. As lawmakers consider proposals to deal with the bill coming due, they have an opportunity to enact reforms that will have a lasting impact on their states’ fiscal health.
