Unfunded State Pension Liabilities Near $5.6 Trillion

Unfunded state pension system liabilities top nearly $5.6 trillion and taxpayers could get stuck with the bill to close the gap.

The new report, prepared for the American Legislative Exchange Council, said state pension systems as a whole can fund only 35 cents of every dollar of obligation they have to retirees–and the problem is getting worse.

Total assets of all 50 state public pension systems have declined nearly 1 percent in value, or roughly $900 billion, according to ALEC’s review, since its last published review in 2014.

“Combined across all states,” the report’s authors said, “the price tag for unfunded pension liabilities is now $17,427 for every man, woman and child in the United States.”

Part of the problem, the report said, is state pension systems use “accounting tricks” to mask the true size of their unfunded obligations.

The most commonly used is for a pension plan to assume high rates of return on investment, in most cases between 7 and 8 percent per year.

For its study, ALEC assumed a 2.3 percent of return, based upon a “an average of the 10 and 20 year [US Treasury] bond yields.”

The higher the rate of return on investment, the lower the future liabilities a pension fund faces, and the better funded the plan appears. Conversely, lower rates of return mean the future liabilities get much larger.

ALEC’s study used the lower return rate because it does “not allow state officials to simply hope for the best and shortchange their pension funds.”

“The public sector’s current assumed rates of return distort how much money is needed to fund the plans today to guarantee and eventually pay out pension benefits in the future,” the report’s authors said. “Ultimately, this will result in broken promises to government employees and financial hardship for taxpayers.”

The ALEC report also said that some states fail to make adequate yearly contributions to their plans due to competing budget priorities.

A 2015 report from the Pew Charitable Trusts said that “only 24 states setting aside at least 95 percent of the [pension contribution] they determined for themselves.”

The ALEC study said smaller states with fewer government employees have the lowest level of unfunded liabilities, while the largest states have the biggest deficits.

Vermont’s unfunded liabilities amounted to just over $8.7 billion, while California’s topped $956 billion.

But on a per capita basis, the worst performing state is Alaska, whose pension liabilities translate to $42,950 per resident.

ALEC said state pension funding isn’t a partisan issue, but “a math problem.”

“Given that pension payments to retired state employees are guaranteed,” the report said, “taxpayers are ultimately responsible for making up any funding deficit.”

“By failing to measure liabilities accurately, any attempt at a solution will be hindered,” the authors said.

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