Last year’s Trillion Dollar Gap has become this year’s Widening Gap.
Fourteen months ago the Pew Center on the States released its landmark study The Trillion Dollar Gap which reported on 2008 fiscal year unfunded liabilities in state public pension and employee retirement health care obligations. Now the Pew Center’s new The Widening Gap published this week said those same liabilities grew 26% in just one year to $1.26 trillion.
Pension and retiree health care obligations are state government equivalents of the federal five-headed monster: Medicare, Medicaid, Social Security, the annual operating budget deficit, and trillions of dollars in principal and interest borrowed to run the federal government.
Some state government revenue streams are beginning to recover from a three-year recession that crippled public sector budgets. Painful decisions were made all across the nation to reduce state government retiree pension and health care account contributions. Investment results also plummeted which helped to create 2008 and 2009 fiscal tornados inside retiree accounts.
Here are some quick facts from The Widening Gap: The Great Recession’s Impact on State Pension and Retiree Health Care Costs:
** Nationally, state public sector pension shortfalls accounted for $660 billion and retiree health care cost shortfalls accounted for $635 billion in fiscal 2009. Pew noted, “Far too many states are not responsibly managing the bill for their employees’ retirement.”
** Nationally, Pew said states had $31 billion or about 5% of the total needed for retiree health care obligations. Georgia’s $20.2 billion total retiree health care liability was just 4% funded. The state made 75% of its $500 million required annual contribution, a $125 million shortfall.
** Nationally, state public sector pension plans were 78% funded at the end of fiscal 2009, down from 84% one year earlier. Georgia’s $79.9 billion pension obligation was 87% funded and the state made its entire $1.3 billion required annual contribution. Three-fifths of state plans were underfunded and just two – New York and Wisconsin – were fully funded as fiscal 2009 ended.
Pew noted the federal Government Accountability Office and independent experts recommend states maintain at least 80% funding levels to satisfy retirement account obligations. Twenty-two states fell short in fiscal 2008 and nine more joined the list in 2009.
Investment earnings – and expectations – play a significant role in the overall health of public sector retirement accounts. Pew noted most states assume an 8% average investment return. For years, that model worked well. Pew said 1984-to-2009 investment returns averaged 9.3%.
But a closer look at the most recent decade is more painful, just a 3.9% annual return between 2000 and 2009. Investment losses in recessionary times have been dramatic. Pew said the Georgia Teachers Retirement System fund lost 13.1% in fiscal 2008, which was not nearly as dramatic as the 28.7% decline in the Pennsylvania State Employees’ Retirement System. Georgia investments rebounded in Fiscal 2010 to earn 11.09%, according to the state retirement system.
“The stakes of this debate are high,” the Pew Center said, “because when a state lowers its investment return assumptions, the projected value of its liabilities and the annual contributions required to meet them increase dramatically. This, in turn, expands the gap between liabilities and assets.”
Ten Best Funded Public Sector State Pension Plans
101% New York
97% North Carolina
92% South Dakota
Ten Best Funded Retiree Health Care Plans
28% North Dakota
(Mike Klein is Editor at the Georgia Public Policy Foundation)
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