Illinois Is Not Alone: States Facing $1 Trillion Pension Shortfall
Policy + Politics

Illinois Is Not Alone: States Facing $1 Trillion Pension Shortfall

iStockphoto/The Fiscal Times

Illinois is the undisputed poster child for having the worst public pension system in the country.

With roughly 40 percent of the state’s $165 billion pension liability unfunded and the courts refusing to allow an overhaul of its highly flawed system, tens of thousands of public employees are left uncertain about their retirements. The state’s credit ratings has dropped to junk status. 

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A new report by the Pew Charitable Trust is a painful reminder that despite the economic recovery and improved revenue picture, many other states continue to gamble by operating with huge gaps between their employee pension obligations and revenues funneled into the retirement programs. 

Indeed, the gap between what states have pledged to retirees and how much they are actually saving to fund those payments now totals $968 billion as of 2013, a $54 billion increase over the previous year, according to the report. 

The picture looks even bleaker when short-falls from local employee pension programs are factored in. Then the overall employee pension gap widens to more than $1 trillion, according to Pew. 

Illinois and two other states – Kentucky and Connecticut—have covered less than half of their pension program obligations. Kentucky has just 44 percent of its $42 billion pension obligation covered, while Connecticut has 48 percent of its $48.9 billion obligation covered. 

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By contrast, North Carolina, Oregon, South Dakota and Wisconsin have covered between 96 percent and 100 percent of their pension obligations. 

The report cautions that the latest data still includes losses from the 2008 financial crisis and Great Recession. Once more recent investment returns are fully realized under new accounting standards, it is likely that a majority of states will record a reduction in unfunded liabilities. 

“Nevertheless, pension debt is expected to remain between $800 billion and $900 billion for state plans … and will remain higher as a percentage of U.S. gross domestic product than at any time before the Great Recession,” the report warns. “State and local policymakers cannot count on investment returns over the long term to close this gap and instead need to put in place funding policies that put them on track to pay down pension debt.” 

There are a number of ways for states to retire their pension debt more effectively, the report notes. Those include shorter amortization periods; steady, level interest payments instead of deferring larger payments until later; and using defined payment schedules rather than refinancing the debt every year. 

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Yet many states continue to resort to gimmicks and accounting “sleight of hand” to balance their budgets and fill glaring gaps in their employees’ pension programs, according to a separate blue-ribbon study issued in June. 

The report, “Truth and Integrity in State Budgeting,” was produced by a task force headed by former Federal Reserve Board Chairman Paul Volcker and former New York Lieutenant Governor Richard Ravitch. 

The creative accounting used by states to meet a legal requirement for balancing their budgets includes shifting the timing of receipts and expenditures across fiscal years, floating bonds and borrowing long-term to fund current expenditures, relying on nonrecurring revenue sources to cover recurring costs, and delaying funding of public employee pension and health care benefits — arguably the states’ biggest sin. 

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“While these actions temporarily solve budget-balancing challenges, they add to the bills someone eventually has to pay,” the report warns. “The never-ending sense of crisis leads to stop-and-go funding of vital programs and stifles the need for serious discussions about policy. It also leaves states vulnerable when economic downturns occur and allows long-term obligations to mount.”