States are not saving enough money to fund their obligations to retirees for health care and pension payments, according to a study released on June 19 by Pew Center on the States, an independent, nonprofit, nongovernmental organization. The gap between obligations and savings grew by 9 percent in fiscal year 2010, to equal at least $1.38 trillion.
According to the Pew study, titled “The Widening Gap Update,” it is estimated that public-employee pension obligations account for about half of the shortfall, and retiree health care costs account for the other half.
The Government Accountability Office recommends that states keep about 80 percent of their future financial obligations on hand. However, 34 states fell below that threshold in 2010, 31 percent fell below in 2009, and 22 percent fell below in 2008. The states with the poorest performance in 2010 were Connecticut, Illinois, Kentucky, and Rhode Island, which each having less than 55 percent of the money needed for retirees, according to the study.
North Carolina, South Dakota, Washington, and Wisconsin were sitting on golden eggs of 95 percent funding.
Investment losses during the economic downturn are the primary cause of the shortfall, according to the report. About 60 percent of the states’ money comes from returns on invested funds, and those returns tanked during the recession. The other 40 percent comes from employee and employer contributions.
“States continue to feel the impact of the Great Recession, and have lost more ground in their efforts to cover the long-term costs of their employees’ pensions and retiree health care,” said David Draine, senior researcher for Pew Center on the States, in a press release. “While the economy and state revenues are improving, states are still struggling to manage the bill coming due for promised benefits.”
The Pew report did not take into account changes states have made since 2010 to cost-of-living adjustments (COLA) and other benefits. A total of 43 states adjusted their pension plans. Many changed the way benefits were calculated, asked for bigger contributions, raised the retirement age and years of service to qualify for pensions, and reduced COLAs.
However, these measures are not retroactive. Pension agreements are binding. New hires must accept reduced plans, but existing public-sector workers and retirees can usually keep their original agreements with their states.
Arizona, Colorado, Florida, Maine, Minnesota, New Jersey, Oklahoma, Rhode Island, South Dakota, and Washington have all cut or reduced COLAs. Consequently, retirees have sued in an effort to halt COLA cuts. Judges upheld the cuts in Colorado and Minnesota, and cases are pending in other states.
“The growing liabilities and funding challenges in some states put retirement benefits at risk, but there are no quick fixes,” said Draine in a statement. “A significant number of states have tried to deal with the bill coming due for their employees’ retirement benefits. However, given the size of the problem, continued fiscal discipline and additional reforms will be needed to put states back on a firm footing.”
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