For years, employers in the private sector have been moving in the direction of versatile, 401(k) style retirement accounts. However, a vast majority of the 20 million state and local government workers in the U.S. have kept their generous, defined-benefit pension plans.
Despite the lofty promises made by policymakers, public employee retirement plans have been neglected over the years and have become huge liabilities that severely threaten the financial health of many states. If legislators do not properly address the crisis in public pensions, they will make current state budget problems look trivial. In fact, as of 2006, states had accumulated nearly $360 billion in unfunded pension obligations, according to a new 50 state study conducted for the American Legislative Exchange Council (ALEC). The report entitled “State Pension Funds Fall Off a Cliff,” is co-authored by Dr. Barry Poulson of the University of Colorado and Dr. Arthur P. Hall of the University of Kansas.
Much of the current data regarding liabilities in public employee pensions was taken before the recent economic downturn, and the study’s authors warn the problem is much worse today since stock market losses have not been fully realized in many official government pension statistics. Other estimates with recent data place the unfunded pension liabilities at $1 trillion nationally.
Poulson and Hall have sampled state data for 2008 in an attempt to measure the current magnitude of the problem. According to their findings, only nine percent of state pension plans met the government standard as “safe.” Defined-benefit pension plans are considered ‘safe’ by government standards if they have enough assets to support at least 80 percent of pension benefit obligations. Illinois has the worst funded pension plan in the nation at 46.1 percent. Keep in mind, the private sector deems defined-benefit pension plans to be “critical” if the funded portion of the plan is less than 65 percent.
This is bad news for the average taxpayer, especially for residents of Colorado and Kansas. According to the study, these two state pension plans have the highest per-capita unfunded pension liabilities in the nation at $3,624 and $2,962 respectively.
Elected officials need to properly monitor the status of their pension funds and bring more accountability to the process. The first step is for states to increase transparency by meeting the guidelines established by the Governmental Accounting Standards Board (GASB). Specifically, state legislatures should require that unfunded liabilities be reported as debt in the financial statements of state and local governments. Also, states should be required to show how they plan to eliminate unfunded liabilities in pension plans within a thirty year time frame.
The only long term solution will be to replace current defined-benefit plans with 401(k) style defined-contribution plans for new employees. This essential reform would constrain the growth of unfunded liabilities and would establish a portable defined-contribution plan for new employees that, over time, would reduce the government’s dependence on expensive and less predictable defined-benefit plans.
If state lawmakers fail to enact fundamental reforms in the area of public employee pensions, the long-term financial health of the states could be compromised – and taxpayers will certainly be left on the hook.
The full report is available below or at ALEC’s website.
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