state retirement systems under funded

8/14/2019 State Retirement Systems Under Funded

1/66


2/66i Pew Center n the Statesi

The Pew Center n the States is a divisin The Pew Charitable Trusts that identies and advances

eective slutins t critical issues acing states. Pew is a nnprt rganizatin that applies a rigrus,

analytical apprach t iprve public plicy, inr the public and stiulate civic lie.

PEW CENTER ON THE STATES

Susan K. Urahn, anaging directr

PRojECT TEAm

Research Consultants

Katherine Barrett and Richard Greene, Pew Center n the States Senir Advisrs

ACKNOWLEDGMENTS

This reprt beneted treendusly r the insights and epertise tw eternal reviewers: Rnald

Snell the Natinal Cnerence State Legislatures and Keith Brainard the Natinal Assciatin

State Retireent Adinistratrs. These eperts prvided eedback and guidance at critical stages

in the prect. While they have screened the reprt r accuracy, neither they nr their rganizatins

necessarily endrses its ndings r cnclusins.

We thank ur Pew clleaguesSean Greene, Natasha Kallay, Lauren Labert, mlly Lyns, matt mrse,

jasn Newan, Gita Ra, Andy Snyder, Daniel C. Vck, jessica Willias and Denise Wilsnr theireedback n the analysis. We thank Sarah Hlt, julia Hppck, Andrew mcDnald, matthew mulkey,

jennier Peltak and Gaye Willias r their assistance with cunicatins and disseinatin. We als

thank Kathleen Litzenberg r her editrial assistance and jshua Rvner r his assistance with data

cllectin. Finally, we thank the any state cials and ther eperts in the eld wh were s generus

with their tie, knwledge and epertise.

Fr additinal inratin n Pew and the Center n the States, please visit www.pewcenteronthestates.org .

This reprt is intended r educatinal and inratinal purpses. Reerences t specic plicy

akers r cpanies have been included slely t advance these purpses and d nt cnstitute anendrseent, spnsrship r recendatin by The Pew Charitable Trusts.

2010 The Pew Charitable Trusts. All Rights Reserved.

901 E Street NW, 10th Flr 2005 market Street, Suite 1700

Washingtn, DC 20004 Philadelphia, PA 19103

Team Leaders

Nancy Y. Augustine

David Draine

Stephen Fehr

Kil Huh

Team Members

Ann Clke

Lri Grange

matt mcKillp

mrgan Shaw

Design and Publications Team

Evan Ptler

Carla Urina


3/66

February 2010

Dear Reader:

A $1 trillion gap. That is what exists between the $3.35 trillion in pension, health care and other

retirement benets states have promised their current and retired workers as o scal year 2008 and

the $2.35 trillion they have on hand to pay or them, according to a new report by the Pew Center

on the States.

In act, this gure likely underestimates the bill coming due or states public sector retirement

benet obligations: Because most states assess their retirement plans on June 30, our calculation

does not ully refect severe investment declines in pension unds in the second hal o 2008 beore

the modest recovery in 2009.

While recent investment losses can account or a portion o the growing unding gap, many

states ell behind on their payments to cover the cost o promised benets even beore the Great

Recession. Our analysis ound that many states shortchanged their pension plans in both good

times and bad, and only a handul have set aside any meaningul unding or retiree health care and

other non-pension benets.

In the midst o a severe budget crisiswith record-setting revenue declines, high unemployment,

rising health care costs and ragile housing marketsstate policy makers may be tempted to

ignore this challenge. But they would do so at their peril. In many states, the bill or public sector

retirement benets already threatens strained budgets. It will continue to rise signicantly i states

do not bring down costs or set aside enough money to pay or them.

The good news? While the economic downturn has exposed serious vulnerabilities in states

retirement systems, it also appears to be spurring policy makers across the country to consider

reorms. This report illustrates that a growing number o states are taking action to change how

retirement benets are set, how they are unded and how costs are managed.

Retirement benets are an important part o how states can attract and retain a high-caliber

workorce or the twenty-rst centuryand the bill coming due or these promises is an

increasingly crucial issue aecting states scal health and economic competitiveness. Later this

year, Pew will release a study o cities public sector retirement benet obligations and their impact

on states. And in the coming months, we will oer additional research on states budgets and

economiesrom the main actors driving scal stress to policy options that could help statesweather the storm.

Sincerely,

Susan Urahn

Managing Director, Pew Center on the States


4/66

Eecutive Suary ...............................................................................................................................................1Key Findings .........................................................................................................................................................................................3

Grading the States ........................................................................................................................................................................11

Ntes ......................................................................................................................................................................................................13

The Bill Cing Due: A Trillin Dllar Gap ......................................................................................................... 15

The Challenge ..................................................................................................................................................................................15

The Iplicatins .............................................................................................................................................................................20

The Pressure munts ...................................................................................................................................................................21

The Rts the Prble ........................................................................................................................................................23The Rad t Rer ........................................................................................................................................................... 30

Factrs Driving Change .............................................................................................................................................................30

Prising Appraches: Setting the Stage r a mre Secure Future ..........................................................33

Grading the States ..............................................................................................................................................................42

Pensins ...............................................................................................................................................................................................42

Health Care and other Nn-pensin Beneits ............................................................................................................42

Cnclusin ...............................................................................................................................................................................45

Endntes ..................................................................................................................................................................................................46

Appendi A: methdlgy ......................................................................................................................................................52

Appendi B: State Grades...........................................................................................................................................................56

Appendi C: Data Cllectin ..................................................................................................................................................58

Table Cntents


5/66The Trillin Dllar Gap

o all the bills cing due t states, perhaps the

st daunting is the cst pensins, health careand ther retireent beneits prised t their

public sectr eplyees. An analysis by the Pew

Center n the States und that at the end iscal

year 2008, there was a $1 trillin gap between the

$2.35 trillin states and participating lcalities had

set aside t pay r eplyees retireent beneits

and the $3.35 trillin price tag thse prises.1

T a signiicant degree, the $1 trillin gap relects

states wn plicy chices and lack discipline:ailing t ake annual payents r pensin

systes at the levels recended by their wn

actuaries; epanding beneits and ering cst-

-living increases withut ully cnsidering their

lng-ter price tag r deterining hw t pay r

the; and prviding retiree health care withut

adequately unding it.

Pews igure actually is cnservative, r tw

reasns. First, it cunts ttal assets in state-runpublic sectr retireent beneit systes as

the end iscal year 2008, which r st states

ended n june 30, 2008s the ttal des nt

represent the secnd hal that year, when states

pensin und investents were devastated by

the arket dwnturn bere recvering se

grund in calendar year 2009. Secnd, st states

retireent systes allw r the sthing

gains and lsses ver tie, eaning that the pain

investent declines is elt ver the curse several

years. The unding gap will likely increase when the

re than 25 percent lss states tk in calendar

year 2008 is actred in.2

many states had allen behind n their payents

t cver the cst prised beneits even bere

they elt the ull weight the Great Recessin.

When Pew irst delved int the real public

sectr retireent beneits in Deceber 2007,ur reprt, Promises with a Price: Public Sector

Retirement Beneits, und that nly abut a third

the states had cnsistently cntributed at

least 90 percent what their actuaries said was

necessary during the previus decade.3 Since that

tie, pensin liabilities have grwn by $323 billin,

utpacing asset grwth by re than $87 billin.4

Pews analysis, bth then and nw, und that

any states shrtchanged their pensin plans in

bth gd ties and bad. meanwhile, a arity

states have set aside little t n ney t pay

r the burgening csts retiree health care and

ther nn-pensin beneits.

As pensin unding levels declined ver the past

decade r states ailures t ully pay r their

retireent bligatins as well as investent lsses

r the bursting the dt-c bubble, states

und their annual required cntributins ging up.

In 2000, when pensin systes were well unded,

states and participating lcal gvernents had

t pay $27 billin t adequately und prised

beneits. By 2004, llwing the 2001 recessin, their

annual payent r state-run pensins shuld have

increased t $42 billin. In iscal year 2008, state and

participating lcal gvernents were n the hk

r re than $64 billin, a 135 percent increase

r 2000. In 2009 and ging rward, that nuber

is certain t be substantially higher. Siilarly, thave adequately unded retiree health care beneits

in iscal year 2008, state and lcal gvernents

wuld have needed t cntribute $43 billin, a

nuber that will grw as re public eplyees

retire and as health care csts increase.

In su, states and participating lcalities shuld

have paid abut $108 billin in iscal year 2008

Eecutive Suary


6/662 Pew Center n the States2

t adequately und their public sectr retireent

beneit systes. Instead, they paid nly abut

$72 billin.

In states with severely underunded public

sectr retireent beneit systes, plicy akers

ten have ignred prbles in the past. Tdays

decisin-akers and tapayers are let with the

legacy that apprach: high annual csts that

ce with signiicant ununded liabilities, lwer

bnd ratings, less ney available r services,

higher taes and the specter wrsening

prbles in the uture.

Althugh investent ince and eplyee

cntributins help cver se the csts,

ney t pay r public sectr retireent beneits

als ces r the sae revenues that und

educatin, public saety and ther critical needs

and the current iscal crisis is putting a tight squeeze

n thse resurces. Between the start the

recessin in Deceber 2007 and Nveber 2009,

states aced a cbined budget gap $304 billin,

accrding t the Natinal Cnerence State

Legislatures (NCSL)and revenues are epected tcntinue t drp during the net tw years.5 Given

these circustancesand the certainty that the

challenges will wrsen i they are nt addresseda

grwing nuber states are cnsidering rers

that can put their public sectr retireent beneit

systes n better iscal ting.

T help plicy akers and the public understand

these challenges and their iplicatins, Pew graded

all 50 states n hw well they are anaging theirpublic sectr retireent beneit bligatins.

Pews analysis ces r an intensive review

data cpiled and reprted by the states

inratin that is publicly available but nt

easily accessible. Pew cllected data n all state-

adinistered retireent plans directly r states

wn Cprehensive Annual Financial Reprts

(CAFRs), pensin plan syste annual reprts

and actuarial valuatins. once the inratin

was assebled, researchers sent the data back

t the states pensin directrs t veriy their

accuracy.6

In additin, interviews were cnductedwith representatives pensin plans in 50

states t prvide perspective, case studies and

an understanding the trends and thees

underlying the data. Pew researchers analyzed

these data t assess the unding perrance

231 state-adinistered pensin plans and 159

state-adinistered retiree health care and ther

beneit plans, including se plans cvering

teachers and lcal eplyees.

States have a lt leeway in hw they cpute

their bligatins and present their data, s

three ain challenges arise in cparing their

nubers. First, states vary in their sthing

practicesthat is, hw and when they recgnize

investent gains and lsses. While st states

acknwledge the ver a nuber years,

several shw their ull ipact iediately.

Secnd, st states cnduct actuarial valuatins

n june 30, but 15 perr the at ther ties,

such as Deceber 31. The severe investent

lsses in the secnd hal 2008 ean that

states that d nt sth and that cnduct

their asset valuatins in Deceber will shw

pensin unding levels that will appear wrse

than states that did s n june 30. Hwever,

this als eans that such states nubers are

likely t shw a aster recvery than ther states.

(In additin, when investents were dingetreely well, their data relected the ull gains

iediately, while ther states sthed thse

gains ver tie.) Finally, ther actrs als can

ipact states asset and liability estiates, such

as assuptins investent returns, retireent

ages and lie spans. (See Appendi A r a ull

eplanatin ur ethdlgy.) Pew attepted

t nte these dierences whenever pssible.

E x E C U T I V E S U m m A R Y



Key FindingsPublic sectr retireent beneits prvide a reliable

surce pst-eplyent ince r gvernent

wrkers, and they help public eplyers retain

qualiied persnnel t deliver essential public services.

Se states have been disciplined abut paying r

their plicy chices and prises n an nging basis.

But r thse that have nt, the inancial pressure

builds each year.

Ang the key indings Pews analysis:

Pensins

In scal year 2008, which r st states ended n

june 30, 2008, states pensin plans had $2.8 trillinin lng-ter liabilities, with re than $2.3 trillin

scked away t cver thse csts (see Ehibit 1).

In aggregate, states systes were 84 percent

undeda relatively psitive utce, because st

eperts advise at least an 80 percent unding level.7

Still, the ununded prtinalst $452 billinis

substantial, and states verall perrance was

dwn slightly r an 85 percent cbined unding

level, against a $2.3 trillin ttal liability, in scal year2006. These pensin bills ce due ver tie, with

the current liability representing benets that will be

paid ut t bth current and uture retirees. Liabilities

will cntinue t grw and, as re wrkers apprach

retireent, the cnsequences delayed unding will

bece re prnunced.

Se states are ding a ar better b than thers

anaging this bill cing due. States such

as Flrida, Idah, New Yrk, Nrth Carlina andWiscnsin all entered the current recessin with

ully unded pensins.

In 2000, slightly re than hal the states had ully

unded pensin systes. By 2006, that nuber had

shrunk t si states. By 2008, nly urFlrida,

New Yrk, Washingtn and Wiscnsinculd ake

that clai.

many states are struggling. While nly 19 states

had unding levels belw the 80 percent ark in

scal year 2006, 21 states were unded belw that

level in 2008:8

Alabaa massachusetts

Alaska mississippi

Clrad Nevada

Cnnecticut New Hapshire

Hawaii New jersey

Illinis oklaha

Indiana Rhde Island

Kansas Suth Carlina

Kentucky West Virginia

Luisiana Wying

maryland

In eight statesCnnecticut, Illinis, Kansas,

Kentucky, massachusetts, oklaha, Rhde

Island and West Virginiare than ne-third

the ttal liability was ununded.

Tw states had less than 60 percent the

necessary assets n hand t eet their lng-

ter pensin bligatins: Illinis and Kansas.

Illinis was in the wrst shape any state, with

a unding level 54 percent and an ununded

liability re than $54 billin.

While states generally are re cautius abut

increasing benets than they were in the early

part this decade, any have been la in

prviding the annual unding that is necessary t

pay r the. During the past ve years, 21 states

ailed t ake pensin cntributins that average

ut t at least 90 percent their actuarially

required cntributinsthe aunt ney,

deterined by actuaries, that a state needs t pay

in a current year r benets t be ully unded in

the lng ter.





STATE PENSION FUNDING LEVELS

SOURCE: Pew Center on the States, 2010.

NOTE: All gures listed above for Ohio are for 2007. The 2008 contribution gures for Ohio are $2,263,766 (actuarially required) and $2,262,847 (actual).

NOTE: 2008 data for all states,except Ohio, which are for 2007.

91.6%107.4%

84.1%91.5%

79.3%83.9%

69.6%78.4%

54.3%68.8%

IN

WI

UT

GA

FL

RI

NJPA

CA

AZ

NDMT

SC

KY

MS

CO

AK

HI

WA

MO

IL

OR

KS VA

LA

NM

OH

NYSD

NC

NH

TX

IA

WY

MN

ME

MI

NV

AL

AROK

ID

NE

VT

MA

CT

MD

DE

TN

WV

Figures are in thousands.

Alabama $40,206,232 $9,228,918 $1,069,214 $1,069,214

Alaska 14,558,255 3,522,661 282,656 300,534

Arizona 39,831,327 7,871,120 1,023,337 1,035,557

Arkansas 21,551,547 2,752,546 555,147 556,755

California 453,956,264 59,492,498 12,376,481 10,469,213

Colorado 55,625,011 16,813,048 1,141,081 779,644

Connecticut 41,311,400 15,858,500 1,248,860 3,243,647

Delaware 7,334,478 129,359 149,614 144,358

Florida 129,196,897 -1,798,789 3,005,387 3,130,378

Georgia 75,897,678 6,384,903 1,275,881 1,275,881

Hawaii 16,549,069 5,168,108 488,770 510,727

Idaho 11,526,600 772,200 256,400 285,400

Illinois 119,084,440 54,383,939 3,729,181 2,156,267

Indiana 35,640,073 9,825,830 1,232,347 1,275,191

Iowa 24,552,217 2,694,794 453,980 389,564

Kansas 20,106,787 8,279,168 607,662 395,588Kentucky 34,094,002 12,328,429 859,305 569,913

Louisiana 38,350,804 11,658,734 1,160,051 1,337,933

Maine 13,674,901 2,782,173 305,361 305,361

Maryland 50,561,824 10,926,099 1,208,497 1,077,796

Massachusetts 58,817,155 21,759,452 1,226,526 1,368,788

Michigan 70,354,300 11,514,600 1,249,909 1,392,709

Minnesota 57,841,634 10,771,507 1,036,509 767,295

Mississippi 29,311,471 7,971,277 662,900 643,356

Missouri 52,827,423 9,025,293 1,219,871 1,072,027

Montana $9,632,853 $1,549,503 $201,871 $211,914

Nebraska 8,894,328 754,748 169,068 169,068

Nevada 30,563,852 7,281,752 1,262,758 1,174,837

New Hampshire 7,869,189 2,522,175 251,764 189,134

New Jersey 125,807,485 34,434,055 3,691,740 2,107,243

New Mexico 26,122,238 4,519,887 667,691 591,279

New York 141,255,000 -10,428,000 2,648,450 2,648,450

North Carolina 73,624,027 504,760 675,704 675,056

North Dakota 4,193,600 546,500 80,928 59,900

Ohio 148,061,498 19,502,065 2,632,521 2,369,045

Oklahoma 33,527,899 13,172,407 1,245,646 986,163

Oregon 54,260,000 10,739,000 707,400 707,400

Pennsylvania 105,282,637 13,724,480 2,436,486 986,670

Rhode Island 11,188,813 4,353,892 219,864 219,864

South Carolina 40,318,436 12,052,684 902,340 902,365

South Dakota 7,078,007 182,870 95,766 95,766Tennessee 32,715,771 1,602,802 838,259 825,259

Texas 148,594,953 13,781,228 1,871,409 1,854,968

Utah 22,674,673 3,611,399 641,690 641,690

Vermont 3,792,854 461,551 83,579 78,743

Virginia 65,164,000 10,723,000 1,486,768 1,375,894

Washington 54,322,900 -179,100 1,545,600 967,900

West Virginia 13,642,584 4,968,709 481,703 510,258

Wisconsin 77,412,000 252,600 644,800 644,800

Wyoming 6,989,764 1,444,353 163,994 108,017

StateLatest

liability

Latestunfunded

liability

Annualrequired

contribution

Latestactual

contribution StateLatest

liability

Latestunfunded

liability

Annualrequired

contribution

Latestactual

contribution

Exhibit 1



Health Care and other Nn-pensinBeneits

Retiree health care and ther nn-pensin

benets create anther huge bill cing due: a

$587 billin ttal liability t pay r current anduture benets, with nly $32 billinr ust

ver 5 percent the ttal cstunded as

scal year 2008. Hal the states accunt r 95

percent the liabilities.

In general, states cntinue t und retiree health

care and ther nn-pensin benets n a

pay-as-yu-g basispaying edical csts r

preius as they are incurred by current retirees.

Fr states ering inial benets, this aycause little prble. But r thse that have ade

signicant prises, the uture scal burden will

be enrus.

only tw states had re than 50 percent

the assets needed t eet their liabilities r

retiree health care r ther nn-pensin benets:

Alaska and Arizna (see Ehibit 2). only ur

states cntributed their entire actuarially required

cntributin r nn-pensin benets in 2008:Alaska, Arizna, maine and Nrth Dakta.

Bth health care csts and the nuber retirees

are grwing substantially each year, s the price

tag escalates ar re quickly than average

ependitures. States paid $15 billin r nn-

pensin benets in 2008. I they had started t set

aside unding t pay r these lng-ter benets

n an actuarially sund basis, the ttal payents

wuld have been $43 billin.

Investent Lsses and FutureIplicatins

The recessin, which cially began in Deceber

2007, dealt a severe blw t all state pensin

systes. In calendar year 2008, public sectr

pensin plans eperienced a edian 25 percent

decline in their investents.9 These lsses generally

are nt ully refected in the scal year 2008 data,

because st state pensin systes use a scal

year that ends n june 30.

A lk at the 2008 investent lsses r a selectin

states suggests that despite the iprveent in

the arket in 2009, the nancial picture r states

retireent systes in scal year 2009 and beynd

will be cnsiderably wrse (see Ehibit 3).

All but three statesIdah, oregn and West

Virginiause a sthing prcess in which

investent gains and lsses are recgnized

ver a nuber years.10 Sthing is a way

anaging state ependitures by preventing

cntributin rates r suddenly uping rdrpping. The nuber sthing years varies,

with ve years being the st cn. Because

nly a prtin the 2008 lsses will be recgnized

each year, there is a great likelihd that pensin

unding levels will be drpping r the net ur

t ve years. This is what happened ater state

pensin systes sustained the less etree

investent lsses assciated with the arket

dwnturn 2001-2003.11 Althugh investent

returns were generally very gd in 2004, 2005 and

2006, the unding levels r st pensin systes

cntinued n a dwnward path until 2007, when

investent returns were strng and the bad years

began t drp ut the calculatins.

Given the eperience the past decade, pensin

plan investent lsses in 2008 raise the questin

whether it reains reasnable r states t

cunt n an 8 percent investent return ver

tiethe st cn assuptin r all 231

state-adinistered pensin plans eained r

this reprt. Se eperts in the eld suggest that

an assued 8 percent yield is unrealistic r the

near uture.12 In additin, it will take cnsistently

higher levels investent returns ver a nuber

years r states t ake up their lsses r

2008 and 2009.





STATE RETIREE HEALTH CARE AND OTHER NONPENSION BENEFITS


NOTE: 2007 or 2008 data for all states,

except Utah and Wisconsin, which are

for 2006.

50.0% or more

10.0%49.9%

1.0%9.9%

0.1%0.9%

< 0.1%

IN

WI

UT

GA

FL

RI

NJPA

CA

AZ

NDMT

SC

KY

MS

CO

AK

HI

WA

MO

IL

OR

KS VA

LA

NM

OH

NYSD

NC

NH

TX

IA

WY

MN

ME

MI

NV

AL

AROK

ID

NE(no data available)

VT

MA

CT

MD

DE

TN

WV

Alabama $15,950,194 $15,549,411 $1,313,998 $1,107,831

Alaska 9,146,629 4,032,052 558,041 600,003Arizona 2,322,720 808,818 146,198 146,198

Arkansas 1,822,241 1,822,241 170,177 38,119

California 62,466,000 62,463,000 5,178,789 1,585,295

Colorado 1,385,954 1,127,179 81,523 25,877

Connecticut 26,018,800 26,018,800 1,718,862 484,467

Delaware 5,489,000 5,409,600 464,600 176,548

Florida 3,081,834 3,081,834 200,973 87,825

Georgia 19,100,171 18,322,123 1,583,008 422,157

Hawaii 10,791,300 10,791,300 822,454 299,466

Idaho 493,746 489,421 45,494 17,695

Illinois 40,022,030 39,946,678 1,192,336 159,751

Indiana 442,268 442,268 45,963 10,218

Iowa 404,300 404,300 42,991 16,613

Kansas 316,640 316,640 16,039 5,105

Kentucky 13,008,572 11,660,245 1,051,372 259,912

Louisiana 12,542,953 12,542,953 1,168,087 269,841

Maine 4,399,800 4,347,702 164,045 196,053

Maryland 14,842,304 14,723,420 1,086,240 390,319

Massachusetts 15,305,100 15,031,600 838,700 701,992

Michigan 40,668,800 39,878,500 3,946,416 1,207,746

Minnesota 1,011,400 1,011,400 109,982 46,677

Mississippi 570,248 570,248 43,627 0

Missouri 2,867,472 2,851,826 262,215 151,629

Montana $631,918 $631,918 $58,883 $0

Nebraska does not calculate its liability for retiree health care and other benets.Nevada 2,211,439 2,211,439 287,217 59,167

New Hampshire 3,229,375 3,054,188 268,848 112,038

New Jersey 68,900,000 68,900,000 5,022,100 1,249,500

New Mexico 3,116,916 2,946,290 286,538 92,121

New York 56,286,000 56,286,000 4,133,000 1,264,000

North Carolina 29,364,734 28,741,560 2,459,469 597,176

North Dakota 123,776 81,276 6,085 6,450

Ohio 43,759,606 27,025,738 2,717,364 855,937

Oklahoma 359,800 359,800 48,200 0

Oregon 868,393 609,793 67,126 45,385

Pennsylvania 10,048,600 9,956,800 823,500 745,600

Rhode Island 788,189 788,189 46,125 28,378

South Carolina 8,791,792 8,638,076 762,340 241,383

South Dakota 76,406 76,406 9,429 3,505

Tennessee 1,746,879 1,746,879 167,787 63,140

Texas 29,340,584 28,611,584 2,236,952 592,507

Utah 677,499 672,843 53,969 53,289

Vermont 1,618,245 1,614,581 107,506 17,776

Virginia 3,963,000 2,621,000 541,163 446,321

Washington 7,901,610 7,901,610 682,797 156,294

West Virginia 6,362,640 6,108,398 174,842 143,582

Wisconsin 2,237,204 1,700,396 205,116 90,134

Wyoming 174,161 174,161 19,292 7,324

StateLatest

liability

Latestunfunded

liability

Annualrequired

contribution

Latestactual

contribution StateLatest

liability

Latestunfunded

liability

Annualrequired

contribution

Latestactual

contribution

Exhibit 2

Figures are in thousands.



Hw States Have Respnded

Fr any years, lawakers in a nuber states

put dealing with the challenges psed by

their public sectr retireent systes. But

r any gvernrs and state legislatrs, a

cnvergence actrs has ade the issues

t critical t ignre. Plicy akers that have

underunded their states liabilities in the past

nw ind they we ar re annually as a

resultand i they pstpne paying the bill

any lnger, the debt will increase even re

signiicantly. This will leave their states, and

trrws tapayers, in even wrse shape,

since every dllar needed t eed that grwing

liability cannt be used r educatin, health

care r ther state pririties. Steep investent

lsses in pensin plan unds in the past tw

years signal that states cannt siply sit back

and hpe the stck arket delivers returns

large enugh t cver the csts. meanwhile,

re and re baby bers in state and

lcal gvernent are nearing retireent, and

any will live lnger than earlier generatins

eaning that i states d nt get a handle n

the csts pst-eplyent beneits nw,

the prble likely will get ar wrse, with states

acing debilitating csts.

mentu r rer is building. Fiteen states

passed legislatin t rer se aspect their

state-run retireent systes in 2009, cpared

with 12 in 2008 and 11 in 2007. States siilarly

enacted a series rers llwing the 2001

recessin, with 18 states aking changes in

2003, cpared with nly ive in 2002 and nine

in 2001.13 And any states are likely t eplre

ptins in their 2010 legislative sessins. At least

a third the states have study cissins, taskrces r ther research initiatives t eaine the

pssibilities r rer.

Because there are legal restrictins n reducing

pensins r current eplyees in st states,

the arity changes in the past tw years

were ade t new eplyee beneits. Ten states

increased the cntributins that current and

uture eplyees ake t their wn beneit


INVESTMENT LOSSES IN 2008 FOR SELECT STATE PENSION PLANS


Exhibit 3

Pennsylvania Pennsylvania State Employees Retirement System

Ohio Ohio Public Employees Retirement System

Pennsylvania Pennsylvania Public School Employees Retirement System

California California Public Employees Retirement System

Illinois Teachers Retirement System of the State of Illinois

Oregon Oregon Public Employees Retirement System

Indiana Indiana Employees Retirement Fund

Virginia Virginia Retirement System

Maryland State Retirement and Pension System of Maryland

Missouri Missouri Public School Retirement System

New Jersey New Jersey Division of Pensions and Benets

North Carolina North Carolina Retirement Systems

Georgia Georgia Teachers Retirement System

23.0%

21.0%

20.0%

19.3%

14.0%

21.0%

26.8%

26.5%

13.1%

22.3%

22.2%

28.7%

19.0%

State Plan name 2008 percentage investment loss



systes, while ten states lwered beneits r new

eplyees r set in place higher retireent ages r

lnger service requireents.14 (See Ehibit 4.)

Rers largely ell int ive categries: 1) keeping

up with unding requireents; 2) reducing beneits

r increasing the retireent age; 3) sharing the

risk with eplyees; 4) increasing eplyee

cntributins; and 5) iprving gvernance and

investent versight.

Keeping up with unding requirements

Generally, the states in the best shape are thse

that have kept up with their annual unding

requireents in bth gd ties and bad. Inse states, such as Arizna, a cnstitutinal

r statutry requireent dictates that this

payent is ade. In early 2008, Cnnecticut

issued a $2 billin bnd t help und the

teachers pensin syste, with a cvenant that

required the state t ully und that plan based

n actuarial assessents.

making the payent required by actuaries is nly

part the battle. States als need t ake sure

the assuptins used in calculating the payent

aunt are accurater eaple, estiating

the liespan retirees r the investent returns

they epect. As nted earlier, se states are

nw questining whether, ver the lng ter,

investent return assuptins have been t

ptiistic. In 2008, Utah reduced its investent

assuptin r 8 percent t 7.75 percent,15 and in

2009 the Pennsylvania State Eplyees RetireentSyste lwered its assuptin r 8.5 percent t

8 percent.16 Althugh the edian investent return

r pensin plans ver the past 20 years averaged

ver 8 percent, se eperts in the ield, including


STATE PENSION POLIC Y REFORMS, 20082009


Both

Increased employeecontribution

Reduced futurebenets

Neither

IN

WI

UT

GA

FL

RI

NJ

PA

CA

AZ

NDMT

SC

KY

MS

CO

AK

HI

WA

MO

IL

OR

KS VA

LA

NM

OH

NYSD

NC

NH

TX

IA

WY

MN

ME

MI

NV

AL

AROK

ID

NE

VT

MA

CT

MD

DE

TN

WV

Exhibit 4



renwned inancier and investr Warren Buett,

believe even thse assuptins are t high.17 By

cparisn, the Financial Accunting Standards

Bard requires that private sectr deined beneit

plans use investent return assuptins basedn the rates n crprate bnds. As Deceber

2008 the tp 100 private pensins had an average

assued return 6.36 percent.18

Reducing beneits or increasing the retirement age

Several states reduced beneits r new eplyees

either by altering the pensin rula r raising

retireent ages.

In 2008 and 2009, Kentucky, Nevada, New jersey,

New Yrk, Rhde Island and Teas reduced beneits

ered t new eplyees r raised the retireent

age, accrding t NCSL.19

Fr eaple, in Nevada, eplyees hired ater

january 1, 2010, will have their annual pensin

beneits calculated using a new rula. In the

past, the state ultiplied the nuber years

service by 2.67 t derive the percentage salary t

be replaced by pensin beneits. That nuber has

drpped t 2.5 percent. Nevadas eplyees als will

have t wrk until age 62, instead age 60, t retire

with 10 years service.

New Yrk lawakers in Deceber raised the

iniu retireent age r 55 t 62 r new hires,

increased the iniu years service required t

draw a pensin r ive years t 10, and capped

the aunt vertie used in calculating beneits.

Teachers have a separate beneit structure that raises

the iniu retireent age r 55 t 57, bsts

the eplyee cntributin rate r 3 percent t 3.5

percent annual wages and increases the 2 percent

ultiplier threshld r pensin calculatins r 20

t 25 years.20

Rhde Island went a step urther than ther states

by applying its change in retireent age t current

wrkers, nt ust new nes. New wrkers will

have a retireent age 62, up r 60, while the

iniu retireent age r current wrkers will

depend n their length service.

overall, ur states tk legislative actin t reduce

retiree health care and ther nn-pensin beneits

r eplyees in 2008, and seven did s in 2009.

Vernt, r eaple, changed the vesting perid

r receiving ull health care beneits s that a new

eplyee nw has t wrk 10 years t receive 40

percent cverage n health preius and 20 years

t get the ull 80 percent cverage. Eplyees

hired bere july 1, 2008, nly have t wrk ive

years t qualiy r 80 percent cverage.21

Se additinal states reduced retiree health

care beneits thrugh adinistrative r eecutive

branch actins. Fr instance, West Virginias Public

Eplyees Insurance Agency decided last suer

that it wuld n lnger pay its share the preiu

r eplyees hired ater july 1, 2010. It paid 71

percent the csts r eplyees hired bere that

date. Several lawsuits have been iled in respnse.

In the past, se states such as Gergia, Nrth

Carlina and Tennessee required that any prpsals

that will aect pensin beneits r csts receive a

ull actuarial analysis t deterine its lng-ter

price tag.22 This ges r changes in retireent

ages, cst--living adustents, any change in the

tie needed t vest in a syste, r any adustent

t the pensin rula. In 2008, Calirnia passed

a law that requires bth state and lcal decisin-

aking bdies t review ptential uture cstsbere increasing any nn-pensin beneits. It als

requires actuaries t be present when pensin

beneit increases are discussed.

Frcing plicy akers t respnsibly identiy the

cst and ptential unding surces r beneit

increases can help states avid ering ununded

beneit hikes. State and lcal gvernents still can




er r increase beneits, but this additinal step

ensures that csts will be thrughly cnsidered

in advance. Althugh such rers will nt reduce

eisting liabilities, they can keep state plicy

akers r aking the unding situatin wrse.

Sharing the risk with employees

A ew states have taken a step tward sharing

re the risk investent lss with

eplyees by intrducing beneit systes

that cbine eleents deined beneit and

deined cntributin plans. These hybrid systes

generally er a lwer guaranteed beneit,

while a prtin the cntributinusually the

eplyees shareges int an accunt that issiilar t a private sectr 401(k). Fr eaple,

Nebraskas cash balance plan, enacted in 2003,

is described by ne state icial as a deined

beneit plan, with a deined cntributin lair.23

As in a traditinal deined cntributin accunt,

the eplyees payut n retireent is based

n what is in the accunt, nt n a set beneit.

But se prtectin is ered t eplyees

thrugh a guaranteed annual investent return

5 percent.

In 2008, Gergia intrduced its wn hybrid syste

r new eplyees hired ater january 1, 2009.

The deined beneit prtin prvides abut hal

the beneit the plan r eplyees hired bere

that pint, but there als is a deined cntributin

prtin in which the state atches eplyee

cntributins in a 401(k)-style savings plan. New

eplyees autatically are enrlled in the

savings plan at a 1 percent cntributin rate, but

ay pt ut at any tie.24

N states ved cpletely away r deined

beneit plans in the past tw years.25 The

last tw that tk any steps in this directin

were Alaska, which ved new eplyees

t a deined cntributin plan in 2005, and

michigan, which ved new state eplyees

t a deined cntributin apprach in 1997.

In light severe investent lsses in 2008

and 2009 that resulted in decreased pensin

unding levels, plicy akers are nce againpenly discussing deined cntributin plans.

Luisiana lawakers, r instance, are lking at

the recendatins a pensin panel that

studied aking this switch.26 other states where

this has been entined by plicy akers

include Flrida, Kansas and Utah.27 Because

unins and ther eplyee representatives

ten have vigrusly ppsed deined

cntributin plans, it is unclear whether any

state will ind such a switch viable, r i such

plans are priarily being prpsed as a starting

pint r hybrid plans r ther cprises.

Increasing employee contributions

Eplyees already cntribute abut 40 percent

nn-investent cntributins t their wn

retireent. But states are lking tward their

wrkers t pay r a larger share. In any states,

the eplyee cntributin is ied at a lwer

rate than the eplyer cntributins. But

se states have re leibility. In Arizna,

r eaple, the pensin syste is designed s

that general (nn-public saety) eplyees and

eplyers each pay equal shares the annual

cntributin. I the eplyer cntributin

ges up, s des the eplyees. Accrding t

Arizna pensin icials, this tends t increase

the attentin that eplyees give t the health

the pensin syste and increases pressure t

keep it well unded.28

Se states, such as Iwa, minnesta and

Nebraska, have the ability t raise eplyee

pensin cntributins i needed. Iwa and

minnesta have been raising eplyee

cntributin rates in the past several years,

and in 2009, Nebraska increased its eplyee





cntributin rates r individuals in its deined

beneit plans. Last year, New meic teprarily

shited 1.5 percent the eplyers cntributin

t eplyees.29 New Hapshire and Teas

increased payrll cntributins required rnew eplyees.30

Several states als began asking eplyees and

retirees t start aking cntributins r their

retiree health care beneits. In 2008, Kentucky

required new eplyees t cntribute 1 percent

their pay t help und their pst-retireent

health care and ther nn-pensin beneits. In

2009, New Hapshire established a $65 nthly

charge r retired eplyees under 65 whare cvered by retiree health insurance. And

Cnnecticut will nw require new eplyees,

and current eplyees with ewer than ive years

service,31 t put in 3 percent their salaries.32

Governance and investment oversight

In recent years, se states have sught t

pressinalize the cple task pensin

investents by shiting versight away r

bards trustees t specialized bdies thatcus n investent. Fr eaple, Vernt

ved investent versight r its pensin

bards t an entity called the Vernt Pensin

Investent Cittee, which includes a

representative elected by each three bards

and the state treasurer as an e-ici eber.33

The change was designed t bring a higher

level epertise t the bdy respnsible r

investing the pensin assets, t cbine the

assets the three retireent systes t realize

adinistrative savings, and t be able t act

re quickly when aking changes t the

actual investent allcatins.

Pensin systes als have cntinued t iprve

gvernance practices t ensure that the bard

trustees is well trained, that the divisin

respnsibilities between bard and sta akes

sense, and that the cpsitin the bard is

balanced between ebers the syste and

individuals wh are independent it. Several

pensin rer cissins are cnsidering

rers siilar t thse enacted by oregn in 2003,heightening qualiicatins r trustees and shiting

ebership s that bards are nt dinated by

pensin recipients.

In 2009, se rers grew ut speciic

prbles that states had with investent practices

r because ethical questins that were raised.

Illinis, r instance, put in place a nuber

prtectins t ensure that pensin trustees,

eplyees and cnsultants are barred rbeneiting r investent transactins. mre

cpetitive prcesses r prcuring cnsulting

and investent services were intrduced, and the

states pensin systes were required t review the

perrance cnsultants and anagers and t

establish ways cparing csts.34

Grading the States

Based n all this inratin, Pew graded all50 states n hw well they are anaging their

public sectr retireent beneit. (See individual

act sheets r each the 50 states at www.

pewcenternthestates.rg/trillindllargap.)

Pensins

Pew assessed states pensin systes n three

criteria and awarded each state up t ur pints:

tw pints r having a unding rati at least

80 percent; ne pint r having an ununded

liability belw cvered payrll; and ne pint

r paying n average at least 90 percent the

actuarial required cntributin during the past

ive years.

States earning ur pints were slid perrers.

Thse earning tw r three pints were deeed




in need iprveent. And thse earning zer

r ne pint were labeled as eriting serius

cncerns.

overall, 16 states were slid perrers, 15 states

were in need iprveent and 19 states were

cause r serius cncerns (see Ehibit 5). All 16

states that were assessed as slid perrers had

unding levels ver the 80 percent threshld,

had anageable ununded liabilities, and had

cntributed n average at least 90 percent the

actuarially required cntributin during the past

ive years. Eight statesAlaska, Clrad, Illinis,

Kansas, Kentucky, maryland, New jersey and

oklahareceived n pints, having ailed take any eaningul prgress tward adequately

unding their pensin bligatins.

Health Care and other Nn-pensinBeneits

Pews criteria r grading states retiree health care

and ther nn-pensin beneit bligatins were

uch sipler and re lenient than thse used

r the pensin assessent. This is because states

generally have set aside little unding t cver the

csts these bligatins and because they nly

recently began t reprt n their nn-pensin

assets and liabilities. In act, states have an average

unding rate 7.1 percentand 20 states have

unded nne their liability.

Because st states have nly recently begun

t accunt r and address these liabilities, Pews

grades easure the prgress they are aking

tward pre-unding uture beneit bligatins.

As a result, a serius cncerns grade was nt

included. Pew rated as slid perrers states that

were abve average at setting aside unds t cver

the bill cing due. States belw average were

identiied as needing iprveent.

Nine states earned the designatin being slid

perrers: Alaska, Arizna, Clrad, Kentucky,

Nrth Dakta, ohi, oregn, Virginia and Wiscnsin.

only tw thseAlaska and Ariznahave set

aside at least 50 percent the assets needed. Frty

states were in need iprveent, having put

away less than 7.1 percent the unds needed

and, as nted abve, hal these have nt set aside

any unds at all. (Nebraska subsidizes retiree health

beneits hwever the state has nt calculated the

aunt this bligatin and therere was ntgraded. See Ehibit 5.)

HOW ARE STATES DOING?


NOTE: Nebraska does not provide any estimates of its retiree health care a nd other

non-pension benets obligation.

SOLID

PERFORMER

NEEDS

IMPROVEMENT

SERIOUS

CONCERNS

16

15

19

AZ, AR, DE, FL, GA, ID, ME, MT, NE, NY,

NC, OH, SD, TN, UT, WI

AL, CA, IA, MI, MN, MO, NM, ND, OR, PA,

TX, VT, VA, WA, WY

AK, CO, CT, HI, IL, IN, KS, KY, LA, MD,

MA, MS, NV, NH, NJ, OK, RI, SC, WV

Grade

PENSIONS

Number of states

SOLID

PERFORMER

NEEDS

IMPROVEMENT

940

AK, AZ, CO, KY, ND, OH, OR, VA, WI

AL, AR, CA, CT, DE, FL, GA, HI, ID, IL,

IN, IA, KS, LA, ME, MD, MA, MI, MN, MS,

MO, MT, NV, NH, NJ, NM, NY, NC, OK, PA,

RI, SC, SD, TN, TX, UT, VT, WA, WV, WY

Grade

RETIREE HEALTH CARE AND NON-PENSION BENEFITS

Number of states

Exhibit 5




1 Pew Center n the States analysis 231 state-adinistered

pensin plans and 159 retiree health care and ther benets plans.

See Appendi A r re details n hw data were cllected and

calculatins were cnducted.

2 Keith Brainard, Public Fund Survey Suary Findings r

FY2008, Natinal Assciatin State Retireent Adinistratrs,

octber 2009, p. 2. www.publicundsurvey.rg/publicundsurvey/

inde.ht. (accessed january 29, 2010).

3 Pew Center n the States, Promises with a Price: Public Sector

Retirement Benefts, Deceber 2007, p. 6.

4 At the tie publicatin the 2007 reprt, a ull set gures

r 2006 was nt available. As nted in the ethdlgy, latest

available is the plan year ending in 2008 r all states ecept r

ohi, which were nt available at the tie publicatin.

5

Natinal Cnerence State Legislatures, State BudgetUpdate: November, 2009. Deceber 2009. Investent returns

cprise between 70 percent and 80 percent pensin plan

unding when ties are gd, with eplyee and eplyer

cntributins aking up the rest. In bad investent years,

such as 2002 and 2008, investent returns are negative and

eplyees and eplyers cntribute all the ney that ges t

cver pensin plan csts. In general, appriately 60 percent

nn-investent cntributins t pensin plans ces r

eplyers and 40 percent ces r eplyees. Eplyee

Benet Research Institute, Public Pensin Plan Asset Allcatin,

Ntes 30, n. 4. April 2009, p. 2; at http://www.ebri.rg/pd/

ntespd/EBRI_Ntes_04-Apr09.PblcPnsPlns1.pd. (accessed n

january 25, 2010).

6 Pew Center n the States researchers als tk the etra step

crss checking ur data with the Public Fund Survey (see www.

publicundsurvey.rg/publicundsurvey/inde.ht), which cllects

pensin data directly r the states.

7 U.S. Gvernent Accuntability oce, State and Local

Government Retiree Benefts: Current Status o Beneft Structures,

Protections and Fiscal Outlook or Funding Future Costs, reprt t the

Cittee n Finance, U.S. Senate, Septeber 2007.

8 The unding levels in Alabaa and maryland were abve 80

percent in 2006 but ell belw 80 percent in 2008.

9 Keith Brainard, Public Fund Survey Suary Findings r

FY2008, Natinal Assciatin State Retireent Adinistratrs,

octber 2009, p. 2. www.publicundsurvey.rg/publicundsurvey/

inde.ht. (accessed n january 29, 2010).

10 Thrugh 2008, Illinis als was ang the sall grup states

in which asset value was assessed n a air arket basis. It shited

t a ve-year sthing perid in 2009. Als, Suth Dakta

sthes its investent gains but accunts r its lsses based n

arket value.

11Economic Report o the President: 2009 Report Spreadsheet Tables ,

Tables B95 and B96; accessed january 4, 2010, at http://www.

gpaccess.gv/ep/tables09.htl. The arket started t rebund

by the end calendar year 2003.

12 Warren Buett Says That Pensin Accunting Encurages

Cheating, Blberg.c, july 17, 2009, accessed n Deceber

4, 2009, at www.blberg.c/apps/news?pid=10000103&sid=a

Cb9PTevRP3g&reer=news_inde.

13 Natinal Cnerence State Legislatures, Pensin and

Retireent Plan Enactents in State Legislatures, (2000 thrugh

2009). www.ncsl.rg/?tabid=13399.

14 Pew Center n the States analysis based n Natinal

Cnerence State Legislatures, Pensin and Retireent Plan

Enactents in State Legislatures, r 2008 and 2009, and a review

gvernrs and state legislative Web sites (octber 1, 2009, tDeceber 3, 2009), as well as interviews cnducted june 1, 2009,

t Deceber 31, 2009.

15 This sunds like a inr change, but the ipact is signicant.

This siple actin reduced the states unding level r 101

percent unded t 95 percent unded. An increase in the interest

rate assuptin t 8.5 percent wuld have caused the unding

level t rise t 113 percent. The new interest rate assuptin will

cause cntributins t g up in the shrt ter, but Utah cials

believe this is a re accurate prtrayal what the state will earn

n its investents ver tie.

16

Pew Center n the States interview with Lenard Knepp,eecutive directr, Pennsylvania State Eplyee Retireent

Syste, june 24, 2009.

17 median investent returns r public retireent plans between

1989 and 2008 are prvided Callan Assciates, a large investent

cnsulting r based in San Francisc, CA. Warren Buett Says

That Pensin Accunting Encurages Cheating, Blberg.c,

july 17, 2009, accessed n Deceber 4, 2009, at www.blberg.

c/apps/news?pid=10000103&sid=aCb9PTevRP3g&reer=n

ews_inde. mr. Buett was reerring t private sectr pensin

assuptins.

18 Watsn Wyatt, Insider: Watsn Wyatt Pensin 1002008

Disclsures Funding, Discunt Rates, Asset Allcatins and

Cntributins, April 2009. www.watsnwyatt.c/us/pubs/

insider/shwarticle.asp?ArticleID=20764.

19 Pew Center n the States interview with Cynthia Webster,

Vernt State Eplyees Retireent Syste, Nveber 2, 2009.

20 Gvernr David A. Patersn, news release, Deceber 2, 2009,

accessed Deceber 4, 2009, at http://www.state.ny.us/gvernr/

press/press_1202092.htl.

NOTES




21 Natinal Cnerence State Legislatures, State Pensins and

Retireent Legislatin 2009, accessed Deceber 4, 2009, at www.

ncsl.rg/?tabid=17594; Pensions and Retirement Plan Enactments in

2008 State Legislatures, accessed Deceber 4, 2009, at http://www.

ncsl.rg/deault.asp?tabid=13313.

22

Pew Center n the States interviews with michael Williasn,directr, Nrth Carlina Retireent Syste, Septeber 2, 2009;

Ty Hills, chie nancial cer, Gergia, Nveber 18, 2009;

and jill Bachus, directr, Tennessee Cnslidated Retireent

Syste, Septeber 3, 2009.

23 Pew Center n the States interview with Phyllis Chabers,

directr, Nebraska Public Eplyees Retireent Systes,

octber 6, 2009.

24 E-ail r Paela Pharris, eecutive directr, Gergia

Eplyees Retireent Syste, Deceber 15, 2009.

25 Natinal Cnerence State Legislatures, State Pensins and

Retireent Legislatin 2009, accessed Deceber 4, 2009, at www.ncsl.rg/?tabid=17594; Pensins and Retireent Plan Enactents

in 2008 State Legislatures, accessed Deceber 4, 2009, at http://

www.ncsl.rg/deault.asp?tabid=13313.

26 Rnald K. Snell, State Pensins and Retireent Legislatin 2009,

Natinal Cnerence State Legislatures, August 17, 2009. www.

ncsl.rg/?tabid=17594. (accessed n january 29, 2010).

27 Bill Ctterell, Fasan Says Gdbye Pensins, Hell Savings,

Tallahassee Democrat, Nveber 16, 2009; Parkinsn Puts

mar KPERS Changes n the Table, Lawrence (Kan.) Journal

World(Assciated Press), Septeber 10, 2009; Lawaker: Utahs

Retireent Syste must Change, The Salt Lake City Tribune ,

Nveber 13, 2009; Barry Pulsn and Arthur Hall, The Funding

Crisis in the Kansas Public Eplyee Retireent Syste, Center

r Applied Ecnics, University Kansas, Septeber 2009.

28 Pew Center n the States interview with Paul matsn, eecutive

directr, Arizna Retireent Syste, june 25, 2009.

29 Pew Center n the States interviews with Dnna mueller, chie

eecutive cer, Iwa Public Eplyees Retireent Syste,

August 4, 2009; David Bergstr, eecutive directr, minnesta

State Retireent Syste, Septeber 8, 2009; Phyllis Chabers,

eecutive directr, Nebraska Public Eplyee Retireent Systes,

octber 6, 2009; Terry Slattery, eecutive directr, New meic

Public Eplyees Retireent Assciatin, Septeber 14, 2009.

30 Natinal Cnerence State Legislatures, Pensin

and Retireent Plan Enactents in State Legislatures,

accessed Deceber 4, 2009, at http://www.ncsl.rg/deault.

asp?tabid=13313.

31 Fr eplyees with ewer than ve years service as july 1,2009, the 3 percent cntributin will begin july 1, 2010.

32 E-ail r Willia mric, Cnnecticut Retireent and Benet

Services crdinatr, Healthcare Plicy and Benet Services

Divisin, Nveber 18, 2009.

33 Pew Center n the States interview with Cynthia

Webster, Vernt State Eplyees Retireent Syste,

Nveber 2, 2009.

34 Natinal Cnerence State Legislatures, State Pensins

and Retireent Legislatin 2009, accessed Deceber 4, 2009,

at www.ncsl.rg/?tabid=17594.



The Bill Cing Due:A Trillin Dllar GapThe ChallengeAn analysis by the Pew Center n the States shws

that states and participating lcal gvernents

ace a cllective liability re than $3.35 trillin

r the pensins, health care and ther retireent

beneits prised t their public sectr eplyees.

They have put away $2.35 trillin in assets t pay r

thse prisesleaving a shrtall re than

$1 trillin that state and lcal gvernents will

have t pay in the net 30 years.35 That aunts t

re than $8,800 r every husehld in the United

States.36 (See Ehibit 6.)

Pews igure actually is cnservative r tw

reasns. First, it cunts ttal assets in states public

sectr retireent beneit systes at the end

iscal year 2008, which r st states ended n

june 30, 2008s the ttal des nt represent

the secnd hal that year, when states pensin

und investents were devastated by the cllapse

the inancial arkets. Secnd, st states

retireent systes allw r sthing gains

and lsses ver tie, eaning that the pain

investent declines will be recgnized ver the

curse several years. The unding gap will likely

increase when that lssre than 25 percent in

calendar year 2008is actred in.37

Pensins

States pensin bills ce due ver tie, including

bth beneits that will be paid ut net year and

thse that will be prvided several decades in

the uture. These lng-ter liabilities represent

bligatins t current eplyees and retirees that

will keep grwing ver tiewhich is why assets

need t be put aside nw t cver the.

50STATE RETIREE BILL

PENSIONS$2.77 TRILLION

OTHER BENEFITS$587 BILLION

The pension bill is much larger than that of other benets, but it is 84percent funded; the bill for other benets is only 5 percent funded.


Funded

Unfunded

$32 billion

$555 billion

$2.31 trillion

$452 billion

Exhibit 6

Acara Rqr Crb

Also known as the annual required contribution, this

is the amount o money that actuaries calculate the

employer needs to contribute to the plan during

the current year or benets to be ully unded by

the end o a span o time o up to 30 years, known

as the amortization period. This calculation assumes

the employer will continue making the actuarially

required contribution on a consistent basis and that

actuarial assumptions, such as investment returns and

rates o salary growth, will be reasonably accurate.

This contribution is made up o the normal cost

(sometimes reerred to as the service cost)thecost o benets earned by employees in the current

yearand an additional amount that will enable

the government to reduce ununded past service

costs to zero by the end o the amortization period.

Making the ull or almost ull actuarially required

contribution in any given year signies that a state is

making a serious eort to pay its bill coming due. The

total actuarially required contribution or all state-run

retirement plans or scal year 2008 was $64.4 billion.

States paid 89.6 percent o that payment.


20/66



T H E B I L L C o m I N G D U E

In eight statesCnnecticut, Illinis, Kansas,

Kentucky, massachusetts, oklaha, Rhde Island

and West Virginiare than ne-third the ttal

liability was ununded. Tw statesKansas and

Illinishad less than 60 percent the necessary

assets n hand t eet lng-ter pensin

bligatins at the end 2008.

Here is a snapsht se the states that

had prund diiculties even bere the Great

Recessin:39

Illinois. The state in the wrst shape in scal year

2008 was Illinis. With a cbined unding level

54 percent, the ve pensin systes Illinis

had accuulated a ttal liability $119 billin,

$54 billin which was ununded. T start

clsing that gap and cvering uture epenses,

the state shuld have ade an actuarially

required payent $3.7 billin in 2008. Instead,

it cntributed a little less than $2.2 billin,

eaning that the state will ace a bigger gap

in 2009 even apart r investent lsses. Fr

Illinis, the ununded liability is re than three

ties annual payrll csts.

Oklahoma.The seven state-adinistered

pensin systes had a cbined unding level

60.7 percent in scal year 2008, a ttal liability

$33.5 billin and an ununded liability that was

219 percent ttal payrll. During the 1980s

and 1990s oklaha increased benets, but

did nt bst cntributins enugh t set

thse increased liabilities.40 By pushing the csts

int the uture, the states actuarially required

cntributin has risen t alst 21 percent

payrll, annually. In additin, the state has

lagged in aking the required cntributins, s

unding levels wuld likely have cntinued n a

dwnward path even withut investent lsses.

LAGGARDS IN STATE PENSION FUNDING

21 states have less than 80 percent of their pension obligations funded.


States with

less than 80%of pension planfunded

IN

72%

WI

100%

UT

84%

GA

92%

FL

101%

RI

61%NJ

73%

PA

87%

CA

87%

AZ

80%

ND

87%MT

84%

SC70%

KY

64%

MS

73%

CO

70%

AK

76%

HI

69%

WA

100%

MO

83%

IL

54%

OR

80%

KS

59%

VA

84%

LA

70%

NM83%

OH

87%

NY

107%SD

97%

NC

99%

NH

68%

TX

91%

IA

89%

WY

79%

MN

81%

ME

80%

MI

84%

NV

76%

AL

77%

AR

87%

OK

61%

ID

93%

NE

92%

VT

88%

MA 63%

CT

62%

MD

78% DE98%

TN 95%

WV

64%

Exhibit 8




Rhode Island. The ur pensin systes

adinistered by Rhde Island had a cbined

unding level 61.1 percent in scal year 2008,

with a ttal liability $11.2 billin and an

ununded liability that is clse t three ties

payrll. While the state has ade its actuarially

required cntributins in recent years, it is still

trying t catch up. Rhde Island essentially

perated its pensin systes n a pay-as-yu-

g basis r nearly 40 years, ending that practice

in the late 1970s.41The state recently increased

the retireent age, instituted a new tier lwer

benets r new eplyees and tightened up

requireents r disability pensins, angther changes.

Connecticut. With a cbined unding level

61.6 percent, Cnnecticuts three pensin systes

had a ttal liability $41.3 billin in scal year

2008 and an ununded liability that is nearly

ur and a hal ties its annual payrll cst. Its

current unding level refects an iprveent in

the teachers pensin syste, which received an

inusin cash in 2008 r a $2 billin, 24-yearpensin bnd that was issued that year.42The

states current cllective bargaining agreeent

lasts until 2017, which liits rer ptins.

Kentucky. Kentuckys si pensin systes had a

cbined unding level 63.8 percent, and a

ttal liability $34 billin in scal year 2008. The

Bluegrass State had an ununded liability that

was 234 percent payrll. In 2000, the plans

were well unded at 110 percent, but years thestate substantially underunding its actuarially

required cntributin, plus signicant benet

increases, led the unding level t pluet.

This prble was cpunded by ununded,

autatic cst--living adustents r retirees

pensins and incentives that were ered r

early retireent.43

Hawaii. The Hawaii Eplyees Retireent

Syste had a unding level 68.8 percent, a ttal

liability alst $16.6 billin in scal year 2008

and an ununded liability that was abut ne and

ne-third ties its payrll. Hawaii had several

prbles that cntributed t its underunded

pensin status. Its legislature diverted abut

$1.7 billin r annual cntributins in the

early years this decade. Als, until 2006, all

eplyees were in a nn-cntributry syste,

which eans they did nt pay anything r their

pensins. This syste is being phased ut, with a

new cntributry plan that began in 2006.

Retiree Health Care and otherNn-pensin Beneits

Retiree health care and ther nn-pensin beneits

represent the ther hal the challenge acing

states: a $587 billin lng-ter liability, with nly

5.44 percent that aunt, r alst $32 billin,

unded as iscal year 2008.

Pew und that nly tw states have re than

50 percent the assets needed t eet theirliabilities r retiree edical r ther nn-pensin

beneits: Alaska and Arizna. An additinal 19

states have unded between 1 percent and

50 percent the assets needed t pay r

these beneits (see Ehibit 9). only ur states

cntributed their entire actuarially required

cntributin r nn-pensin beneits in 2008:

Alaska, Arizna, maine and Nrth Dakta.

Fr any years, states ered their retireeshealth care beneits withut ever identiying the

lng-ter csts. That changed in 2004 when

the Gvernental Accunting Standards Bard

created stateents 43 and 45 that required

gvernents t reprt n their lng-ter

liabilities r retiree health care and ther nn-

pensin beneits.44 Pews 2007 reprt, Promises




with a Price, prvided the irst 50-state assessent

the cst these beneits by cpiling

valuatin igures r large state plans.

As uch as state pensin systes vary, the range

liabilities r nn-pensin beneits is even

greater. Se states, including Iwa, Kansas,

Nrth Dakta, Suth Dakta and Wying, have

very inial bligatins. They generally d nt

prvide retirees with help in paying preius,

but such states ay allw retirees t be n the

sae plan as active eplyees, thereby incurring

se csts assciated with having lder plan

ebers wh are likely t have re health

prbles. other states, such as Arizna, Flrida,oklaha and Virginia, have cntrlled csts by

capping the aunt beneits paid.45 Still thers

have develped dierent ways handling this

issue. Fr eaple, Iwa allws retiring eplyees

t use a sick leave balance t buy int the

eplyee health plan r the perid bere they

are eligible r medicare.46

Se states have liabilities that are very large. In

act, a cuple the states with the largest retireehealth liabilities als have the st underunded

pensin systes. Cnnecticut has a $26 billin

retiree health care liability with n unding set

aside as 2008 t deal with that lng-ter bill,

and Hawaii has an ununded $10 billin liability.

Illinis has a nearly $40 billin liability with nly

$75 illin in unding set aside.

Unlike pensins, states generally cntinue t und

retiree health and ther nn-pensin beneitsn a pay-as-yu-g-basispaying health care

csts r preius as they are incurred by current

retirees. Se state icials argue that these

liabilities are nt as daunting as the pensin bill,

because there are ewer legal barriers t changing

beneits r increasing eplyee cntributins

r retiree health care beneits. Still, because bth

edical csts and the nuber retirees grw

substantially each year, csts escalate ar re

quickly than average ependitures. States paid

$15 billin r nn-pensin beneits in 2008. I

they had unded these beneits n an actuarially

sund basis by putting away adequate ney tpay r uture beneits, the ttal payents shuld

have been $43 billin.

For all states that are at least 1 percent funded.


PERCENT

FUNDED

5.5

10.4

18.7

24.0

29.8

33.9

34.3

38.2

55.9

65.2%

5.4

4.1

4.0

2.5

2.5

2.1

1.9

1.8

1.7

1.4

1.2

Assets Liabilities

0 5 10 15 20 25 30 35 $40

Maine

Delaware

South Carolina

Massachusetts

Michigan

North Carolina

Texas

Alabama

West Virginia

Georgia

New Hampshire

New Mexico

Kentucky

Colorado

Wisconsin

Oregon

Virginia

North Dakota

Ohio

Alaska

Arizona

RETIREE HEALTH CARE AND OTHER

NONPENSION BENEFITS FUNDING

Exhibit 9

(billions)




While paying re nw ay sund like an

unattractive ptin t states, it will keep csts r

uping substantially in the uture. A 2007 study

und that i Nevada cntinued t llw a pay-as-

yu-g apprach, the $49 illin annual cst in2009 wuld grw t $105 illin a year in 2015.47

Siilarly, barring any change in beneit structure,

maines $94 illin annual payent in 2009 wuld

grw t $151 illin a year in 2015.48 New jerseys

retiree health beneit plans were epected t pay ut

$1.4 billin in 2009 r edical care and drug csts;

this wuld re than duble t $3.1 billin in 2017

assuing n ar rers ccurred.49

The IplicatinsIn states with severely underunded public sectr

retireent beneit systes, plicy akers ten have

ignred the prble in the past. Tdays decisin-

akers and tapayers are let with the legacy

that apprach: high annual csts that ce with

signiicant ununded liabilities, lwer bnd ratings,

less ney available r services, higher taes and

the specter wrsening prbles in the uture.

T se etent, even with signiicantly underunded

systes, prbles still can be put . But plicy

akers wh chse this curse will leave their

statesand trrws tapayersin even wrse

shape. Each year that lawakers delay taking actin

aggravates the prble in the uture, putting the

state at risk ar increases in annual csts.

Rhde Islands auditr general vividly illustrated the

prbles with a severely underunded pensin

syste in an audit released several years ag.50

The reprt pinted ut that the City Cranstns

Plice and Fire Eplyees Retireent Syste had

paid $21.7 illin in 2006 r 505 individuals, the

vast arity already retired. By cntrast, the 110

lcal units Rhde Islands municipal Eplyees

Retireent Syste cllectively paid $20 illin

that year r plans that cvered re than 14,000

individuals. Cranstns syste was nly 15 percent

unded in 2006, while the units in the Rhde Island

unicipal syste were 87 percent unded n

average. At that pint, the Cranstn plan had run ut

ptins. It had 98 active ebers and 407 retireeswh legally had t be paid. By putting payents

r s lng, the city eventually aced a debilitating

annual bill.

T prevent situatins like this, actuarially sund

pensin systes ensure that eplyees and

eplyers cntribute suicient ney n an annual

basis t cver beneits that are earned that year.

Thse payentsnral cstsare calculated

by actuaries using a variety assuptins abutinvestent rates, retiree lie span, salary grwth and

any ther actrs.

In the rare instances where a plan has little r n

ununded liability, these nral csts ake up the

entirety the actuarially required cntributin.

In thse cases, as lng as pensin beneits are

derate, the annual cntributin t the plan is

a relatively lw percentage the plans cvered

payrll. In Nrth Carlina, r eaple, the actuariallyrequired cntributin was $675.7 illin r 3.2

percent payrll in iscal year 2008. In Wiscnsin, it

was $644.8 illin r 5 percent payrll.

Ununded liabilities develp when gvernents

ail t prvide unding as beneits are earned

and als when inaccurate assuptins are used

t calculate payent aunts. Fr states with

underunded pensin systes, thse annual csts

bece re epensive. That is because a secndpayent is added t the actuarially required

cntributin that is intended t eliinate the

ununded liability ver a perid n re than 30

years, accrding t rules set by the Gvernental

Accunting Standards Bard. In Cnnecticut,

with its large ununded liability, the aggregate

actuarially required cntributin r the three

state-adinistered pensin systes was nearly




$1.25 billin r 35.3 percent payrll in iscal year

2008. Fr Nevadas three systes, it was alst 1.3

billin r ust ver 24 percent payrll.

When states d nt eet the actuarially required

cntributin, the ununded liability cntinues t rise

(see Ehibit 10), and required payents in uture

years grw even larger.

The latest igures shw that cllectively states

ell signiicantly shrt their actuarially required

cntributins, skipping se $6.6 billin in pensin

payents and alst $28.2 billin in payents r

retiree health care and ther nn-pensin beneits.

At the sae tie, ununded pensin liabilities went

up by $87.8 billin. T cver this added aunt

during the net 30 years, assuing 8 percent

investent returns, states will have t pny up an

additinal $7 billin in payents each year.

As the nuber retirees increases ver tie,

etreely underunded systes cnrnt an

additinal prble: their assets need t be

kept re liquid t pay beneit checks. As a

result, investent pprtunities that can prve

advantageus t a large investr with a lng

hrizn are clsed . In Kentucky, the pensin

systes cash lw prbles deinitely ipact ur

ability t recver, said mike Burnside, eecutive

directr the Kentucky Retireent Systes. I

yu have t cus n shrter-ter investents and

re liquid assets, yu cant take advantage the

lnger yield ver the lnger perid tie.51

The Pressure muntsSe underunded pensin systes already were

straining t increase cntributins prir t the

Great Recessin. These increased cntributins all

n the state and ther public sectr eplyers.

Fr oklahas state eplyers, r eaple,

the states pensin cntributin rates have been

ging up abut 1 percentage pint a year r thepast ive years. They are still alling shrt what

is necessary t eet actuarial deands. By 2010,

the cntributin reaches 15.5 percent payrll,

and current law has it tpping ut at 16.5 percent

in 2011.52 Illinis was able t cntribute nly abut

58 percent the $986.4 illin it shuld have

set aside in iscal year 2008and the burden

cntinues t grw. Fr iscal year 2010, Illinis

eplyer cntributin went r 21.5 percent t

28.4 percent payrll r the State Retireent

Systes, which include state eplyees, udicial

eplyees and the General Assebly.53

A GROWING BILL: 50STATE TOTAL REQUIRED CONTRIBUTION

The annual bill to fully fund all 50 states pension

obligations has risen 135 percent since 2000.


200820072006200520042003200220012000

$27billion

$27billion

$29billion

$34billion

$42billion

$50billion

$55billion

$61billion

$64billion

Exhibit 10




In the vast arity states, the eect signiicant

investent lsses r 2008 and early 2009 have nt

yet been ully actred int cntributin rates. But

given the etent the lsses, it is likely that even

states that have unded their pensin plans well inthe past will ace large increases in annual payents.

oregn prvides a unique early warning the

ipact the draatic drp in pensin investents.

It is ne 15 states in which the 2008 asset

valuatins r at least se the plans were

calculated as the end the calendar year and, as

a result, shw the eects the devastating secnd

hal the year. In additin, oregn, like Idah and

West Virginia, calculates its pensin assets based nair arket value. All the ther plans sth ut

their investent gains and lsses ver a set nuber

years, recrding nly a prtin the ipact

each year.54This eans that oregn tk the ull

brunt its 27 percent lss in 2008while ther

states unding levels will likely cntinue t drp

r the net ur r ive years, as the ar lsses

eperienced in 2008 and the irst quarter 2009

are gradually incrprated.55

oregns lss cntributed t a assive drp in

its pensin unding level, r 112 percent in

2007 t 80 percent in iscal year 2008. While the

states pensin liabilities went up by alst $1.4

billin, the states assets drpped by $15.8 billin.

oregn went r having a pensin surplus

$6.5 billin t having an ununded liability

$10.7 billin. Paul Cleary, eecutive directr the

oregn Eplyees Retireent Syste, epects

that because investent lsses, its eplyer

cntributins will rise r 12 percent payrll

paid in the states current bienniu t 18 percent56

payrll in the 20112013 bienniu, abut a $750

illin increase.57 When we lk at cuulative

investent returns ver the last 10-year perid, it

was wrse than the decade that included the Great

Depressin, said Cleary.

The critical questin r states is whether the

investent returns the past tw years are

analus r whether they signal a undaental

change in hw the arkets will be perating.58 As

with ther state systes, oregns returns in 2009have been cnsiderably better, at 13.8 percent as

Septeber 30, 2009.59 But even i their returns

cntinue t iprve, states will take a very lng

tie t recver the grund they lst. Barry Kzak,

an actuary and aculty eber the Center r Ta

Law and Eplyee Beneits at the jhn marshall Law

Schl in Chicag, was asked t deterine hw lng

it wuld take r a pensin und t recver r a

ne-tie, 24 percent lss in value. Kzak said the und

wuld have t ake 16 percent in annual investent

returns r the net ive years t accuulate as uch

as wuld have been accrued i they had cnsistently

received the histrically anticipated 8 percent rate

return ver the sae perid tie.60

mntana prvides a gd eaple what states

are up against in trying t recver using investent

returns alne. The investent lss r the states Public

Eplyees Syste was 20.7 percent in iscal year

2009 and 4.9 percent in iscal year 2008, said Carrll

Suth, eecutive directr the mntana Bard

Investents. But because the pensin und als did

nt ake its epected 8 percent rate return, the

shrtall is really alst 28.7 percent and alst 12.9

percent r each thse iscal years respectively.61

The alst unavidable upcing increases in

eplyer cntributins culd nt ce at a wrse

tie. These actuarial deands have hit ust as states

revenues have been squeezed by the recessin.

Eplyer cntributins ce ut the sae pt

ney that unds educatin, medicaid, public

saety and ther critical needs. Between the start

the recessin in Deceber 2007 and Nveber

2009, states aced a cbined budget gap $304

billin, accrding t the Natinal Cnerence

State Legislatures (NCSL).62 Budgets have cntinued


27/66




Back in the 1970s, state pensin systes generally

relied n cnservative investents that delivered a

lw but relatively cnsistent rate return. During

the net several decades, hwever, pensin systes

lsened up their restrictins n aking investentsin equity, real estate and, re recently, private equity.

In 1990, 38 percent pensin plan assets were

invested in equities, bradly deined. By 2007, equity

investents accunted r 70 percent all state

pensin plan assets, accrding t Federal Reserve

Bard data.76

In the 1990s, states enyed strng returns and pensin

assets sht up s draatically that by 2000, se

pensin unds began t lwer cntributin ratesbecause they were ver-unded. But the eperience

the early part this decade and the past tw years,

in particular, prvided state icials with a vivid view

the dwnside the re aggressive investent

strategies that any states adpted.

The duble blws negative investent returns

in 2008 and the irst quarter 2009 shattered

epectatins and sent pensin bards and sta int

waves sel-eainatin even ater returns begant resuscitate ater march 2009. Are investent

epectatins, typically arund 8 percent, set t high?

Are investent prtlis prperly diversiied? Has the

drive r greater returns subected pensin systes t

ecessive risks? Slid, data-based answers are still ew

and ar between.

Falling Behind in PayentsA new pensin syste can ake a variety attractive

prises at what appears t be a relatively lw cstbecause, at irst, the nuber retirees wh cllect

beneits is sall.

Pensin systes with really severe prbles ten

started ut as pay-as-yu-g plans in which retirees

derived their beneits r current state revenues, nt

any pl accuulated cash. Inevitably, the nuber

retirees grew relative t the nuber current

eplyees, and the checks ging ut the dr tk up

a larger and larger prtin state revenues. Indianas

State Teacher Retireent und is a gd eaple. In

2007, when it had its latest actuarial valuatin, it was

nly abut 45 percent unded. Bere 1996, there wasn intent t und this plan. only ater that year was

a new pensin syste designed that was based n

actuarially sund practices.77 The sae prble aects

Rhde Islands severely underunded Eplyees

Retireent Syste, which perated essentially n a

pay-as-yu-g basis r 1936 t the late 1970s. It still

is nly abut 57 percent unded even thugh it has

ade 100 percent its actuarial cntributins since

the early 1980s. Yure paying r the sins the past,

said Frank Karpinski, eecutive directr the Rhde

Island syste. Little attentin was paid in the early

years t actuarial questins; in thse days, yu passed

legislatin and asked questins later, Karpinski said.78

As state pensin systes atured, they ved away

r a pay-as-yu-g apprach t ne in which

beneits are unded as they are earned. As nted

abve, actuaries in each syste calculate the annual

required cntributin based n the nral cst and

a prtin the ununded liability. But in the vast

arity states, legislatures set the aunt that is

paid, which ay dier substantially r the actuarially

required cntributin. In tugh ecnic ties, this

ay be ne any decisins a legislature akes in

priritizing ependitures. But states als ade liited

cntributins when ties were lush. During the past

ive years, 21 states ailed t ake pensin payents

that averaged ut t at least 90 percent their

actuarially required cntributins. Yu need t akecntributins in all arket envirnents, said michael

Travaglini, eecutive directr the massachusetts

Pensin Reserves Investent manageent Bard.79

States ten have given theselves a unding

hliday in respnse t avrable investent returns.

By 2000, ully hal the states had reached 100

percent unding their pensin systes, due t the

state retirement systems under funded

Documents