A recent report from the American Legislative Exchange Council (ALEC), said that, based on its calculations, every US state’s pension system has a funded level below 50%, except for that of Wisconsin, which has a funded level of 61.5%.
According to the report from the nonprofit organization of fiscally conservative state legislators, the highest-funded states after Wisconsin are South Dakota (48.1%), New York (46.3%), Tennessee (45.9%), and North Carolina (45.0%). Meanwhile, the five lowest-funded states are Connecticut (19.7%), Kentucky (20.9%), Illinois (23.3%), Mississippi (24.2%), and New Jersey (25.7%).
“Absent significant reforms, unfunded liabilities of state-administered pension plans will continue to grow and threaten the financial security of state retirees and taxpayers alike,” said the report. “The fiscal calamity could be far deeper and prolonged than the Great Recession.”
ALEC’s Center for State Fiscal Reform analyzed the official annual financial documents of more than 280 state-administered pension plans using what it deems “more realistic investment return assumptions” in order to gain a clearer picture of the pension problem.
The unfunded liabilities of each pension plan were revalued using a discount rate equal to a risk-free rate of return represented by debt instruments issued by the US government. It said that 2017’s study used a risk-free rate of 2.142%, derived from an average of the 10- and 20-year US Treasury bond yields from April 2016 to March 2017.
“Based on these revised investment return assumptions, we report on total unfunded pension liability, unfunded pension liabilities per capita, and the funding ratio of these plans,” said ALEC.
The report said that unfunded liabilities of public pension plans continue to loom over state governments, and that if pension assets were determined using “more realistic investment return assumptions,” pension funding gaps would be even larger than what is being reported in state financial documents.
ALEC said that unfunded liabilities, using a risk-free rate of return assumption of state-administered pension plans, now exceed $6 trillion—an increase of $433 billion from last year.
“The national average funding ratio is a mere 33.7%, amounting to $18,676 of unfunded liabilities for every resident of the United States,” said the report. “Much of this problem is due to state governments failing to make their annually required contributions.”
The report cited a 2017 Pew Charitable Trusts report that found that only 32 states in fiscal year 2015 made pension fund contributions sufficient enough to diminish accrued unfunded liabilities.
“Taxpayers ultimately provide the wages for public sector employees and the financial resources to cover the promised benefits of traditional pension plans,” said the report. “And all residents are impacted when pension costs absorb limited government resources, rather than core government services such as education, public safety, and roads.”
Faulty accounting and reporting methods obscure the magnitude of unfunded liabilities, according to the report. It said that significant changes made by the Governmental Accounting Standards Board (GASB) in 2012 to the methods used for measuring a pension plan’s financial health were intended to increase transparency, consistency, and comparability of pension information.
“Unfortunately,” said the report, “states have found ways to work around these requirements and paint an unrealistically rosy picture of their pension funding status.”