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Report: savings gap for pensions growing

Study shows most states are not meeting financial obligations

Posted: May 18, 2011 1:55 a.m.
Updated: May 18, 2011 1:55 a.m.

The gap between promises states made for employees’ retirement benefits and the money they set aside to pay for them is widening, according to an April report by The Pew Center on the States.

During the Great Recession, the gap increased 26 percent in just one year, growing to at least $1.26 trillion in fiscal year 2009.

State pension plans represented slightly more than half of the shortfall. Combined, states tucked away $2.28 trillion to cover long-term liabilities — totalling $2.94 trillion — leaving a $600 billion gap.

Steep revenue declines in 2009 seriously depleted state government piggy banks and strained their ability to pay for annual retirement costs.

Business analysts studying the financial risks recommended that states pay nearly $115 billion into their funds to build up their assets so they could meet long-term obligations.

But with the recession draining money from state coffers, states only contributed $73 billion, or 64 percent of their total annual bill.

The ability for states to meet their annual payment obligations may not improve any time soon, either, according to Pew Center, a nonprofit research and public opinion organization.

Overall state pension programs were only funded at slightly less than 78 percent of what is needed, declining 6 percentage points from the 2008 level of 84 percent.

The only state to enjoy a surplus was New York, with a funding level of 101 percent.

Most experts, including the Government Accountability Office, advise states to have at least an 80 percent funding level, according to the Pew report.

Thirty-one states were below this threshold in fiscal year 2009, a dramatic increase from the previous year, when only 22 states were less than 80 percent funded.

California’s pension system was funded at 81 percent, with its latest percentage paid equaling 82 percent.

While the state is at least meeting the minimum threshold, its liability is the highest in the nation.

Responsible management
The Pew pension study concluded that far too many states are not responsibly managing the bill for their employees’ retirement plans.

In contrast, though, states and local governments only had to pay $27 billion to adequately fund their programs in fiscal year 2000.

By 2009, the annual pension payment requirement had increased 152 percent over the previous nine years.

Experts agreed, according to Pew, that making full annual contributions to pension funds is a key factor to successfully managing the long-term obligations of state retirement systems.

Record investment losses typified fiscal year 2009. The nation’s pension plans suffered a medium 19.1 percent drop in their assets’ market value.

Fiscal year 2010
Data for 2010 was only available for 16 states at the time of the Pew center report, but a review of the average funding level in those states fell again to contributions of only 75 percent.

The states for which pension information was available represented more than a quarter of the U.S. population in 2009.

While 10 states saw a decline in their pension funding levels, ranging from 1 percent to 9 percent drops, three state pension systems actually rebounded, with funding-level increases of 2 percent in Vermont to 5 percent in Idaho.

Until data is available for all states in the fiscal year 2010, the final results won’t be known.

Also, states report investment gains at different times of the year, creating variations in preliminary reports. And some states also spread their investment returns out over time to avoid year-over-year changes in funding levels and required contributions.

Overall, the study concluded states may have benefited from better returns in 2010, but the long-lasting effect of the financial crisis on the pension funds will remain an issue for years to come.

Discount rate
Most states use an 8 percent discount rate as an average for an investment target that states expect to earn on funds in future years.

The rate used is important because it affects how liabilities are calculated and whether pension programs are adequately funded.

For many years states actually exceeded that average. The medium investment return was 9.3 percent from 1984 to 2009.

But in the past decade, that figure was only 3.9 percent.


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