Several states have unfunded liabilities that can only be fixed with major reforms. Unfortunately, politicians find it easier to ignore the problem.
By: Jon Pritchett, President and CEO of Mississippi Center for Public Policy.
Unfunded public-pension liabilities are not a fun subject, and most politicians do all they can to avoid it. Nobody wants to be the sober one in a room full of drunks — but the party can’t go on forever, and eventually someone will have to clean up the mess.
According to a comprehensive survey by the American Legislative Exchange Council (ALEC) of 280 state-administered public-pension plans, the unfunded liabilities of state-administered pensions now exceed $6 trillion. The number increased by $433 billion in the last twelve months. An April report from Pew Charitable Trusts shows that state-pension debt has increased for 15 consecutive years. While this growing gap is a major concern for current public-sector employees and retirees, it should also worry the rest of us.
As the costs of providing current pension benefits begin to weigh on city and state budgets, other public services are getting crowded out. This is putting pressure on many pension-plan managers to seek greater returns by buying riskier assets. Decades of underfunding adds to the pressure, as governments scramble to meet unrealistic return targets and pay out promised benefits at a level the private sector moved away from decades ago. This all points to the growing possibility that many states will need to raise taxes to keep the party going. But without major pension reform, we may soon see the day when taxpayers in fiscally responsible states are asked to bail out those states that just couldn’t, or wouldn’t, stop partying.
A few examples of what some of the party favors look like will help explain why the clean-up phase will be so infuriating. The retired head of the Oregon Health & Science University takes home a pension of $76,111 — each month! Fifty-eight percent of police and firefighters in Scranton, Pa., are on disability pensions; the average retirement age of a Scranton police officer is just under 45 years old. In Nevada, the average full-career state worker will receive more than $1.3 million in lifetime pension benefits. In five states (California, West Virginia, Oregon, Texas, and New Mexico), a retiree can receive an annual pension income that exceeds his last yearly salary.
In Mississippi, the unfunded pension picture is not a pretty one. We have total unfunded liabilities of over $80 billion. On a per capita basis, that means each Mississippian is responsible for roughly $27,000 of the debt. We only have 24 percent of these promises currently funded. But this issue affects states of all sizes and politics, and from all regions.
The states with the largest per capita debt are somewhat surprising: Alaska, Connecticut, Ohio, Illinois, and New Mexico. So are the states with the smallest per capita share of debt: Tennessee, Indiana, Nebraska, Wisconsin, and North Carolina.
However, perhaps the most important measure for a state’s pension health is its funding ratio. This is the percentage of the total pension obligations that is currently funded. The states that are the least funded to meet obligations include Connecticut (20 percent), Kentucky (21 percent), Illinois (23 percent), Mississippi (24 percent), and New Jersey (26 percent). In other words, Connecticut has saved $1 for every $5 of known debt obligation it has for current and future state system retirees. The states in the best shape: Wisconsin (62 percent funded), South Dakota (48 percent), New York (46 percent), Tennessee (46 percent), and North Carolina (45 percent).
What do the data tell us? For starters, note the strong correlation between states that have managed their pension programs responsibly and states with pro-growth economic policies that favor free-market solutions over government ones. Note that each of the five states with the highest funding levels are also states that rely less on the government to sustain their economies. In none of these states does government control more than 45 percent of the economy, which puts these states in the top half of that measure.
On the other end of the spectrum, 57 percent of Kentucky’s economy is controlled by government, while the public sector controls 55 percent of Mississippi’s economy. Obviously, states such as New Jersey and Illinois suffer from powerful public-employee unions that resist any attempts to adjust spending, renegotiate bad contracts, or move new employees to 401(k)-type retirement accounts that require self-financing of retirement programs (as with the tens of millions of workers in the private sector). But even in states without public-sector unions, such as Mississippi, lawmakers have been hesitant to make necessary changes.
The party is over. This is an easy math problem that, unlike the financial crisis from ten years ago, everyone can see coming. Let’s turn the lights on in state capitols and city halls everywhere and get the cleanup started.