Study: States face $2.73 trillion bill for retiree benefits
States have promised at least $2.73 trillion in pension, health care and other retirement benefits for public employees over the next three decades, according to a report by the Pew Charitable Trusts’ Center on the States.
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According to the report, states have saved enough to cover about 85 percent of their long-term pension costs but only 3 percent of the funds needed for promised retiree health care and other non-pension benefits.
All told, the report says, states already have set aside about
$2 trillion to meet their long-term obligations. However, they
still need to come up with about $731 billion—a conservative
figure that does not include all costs for teachers and
local-government employees.
“Now we know the magnitude of this bill—and paying it
will require an enormous investment of taxpayer dollars,”
said Susan Urahn, managing director of the Pew Center on the
States. “For states that have dug themselves into a deep
hole, there are no quick and easy solutions, but there are fiscally
responsible steps all states can take. These will require time,
attention and, above all, political will.”
The report—titled “Promises with a
Price”—is the first 50-state analysis of its kind,
according to the Pew Center on the States.
Pensions plans are in good shape
According to the report, state pension plans are in reasonably good
shape. At the end of fiscal-year 2006, the report says, states had
set aside over $1.99 trillion of the $2.35 trillion that they had
made in pension promises—leaving about $361 billion
unfunded.
But, the Pew report adds that the good news nationally masks
important variations across the states:
- Over the past decade, only one-third of the states have
consistently set aside the amount that their own actuaries said was
necessary to cover the cost of promised benefits over the
long-term.
- Twenty states had funding levels of less than 80 percent at the
end of FY 2006—below what most experts consider
healthy.
- Several states have seen particularly troubling drops in their
pension funding levels. Some of the biggest drops have occurred in
Hawaii, Kentucky, New Jersey, Pennsylvania and Washington.
Retiree health care and other benefits are largely
unfunded
Because of a new rule promulgated by the Governmental Accounting
Standards Board, states will be required to identify their costs
for non-pension benefits such as health care, dental and life
insurance, beginning with their FY 2008 financial reports (which
are expected to come out between December 2008 and March 2009). The
Pew Center on the States has developed what it calls “a
first-of-its-kind preview” of these costs.
The Pew report found that states' long-term price tag for retiree
health care and other non-pension benefits is about $381 billion
for state employees alone, excluding obligations for teachers and
other local-government workers. According to the report, about 97
percent of that 30-year obligation was unfunded at the end of FY
2006.
Among the other key findings:
- Only six states—Arizona, North Dakota, Ohio, Oregon, Utah
and Wisconsin—were on track at the end of FY 2006 to have
fully funded their non-pension promises for the next 30 years. Half
of the states account for almost 94 percent of the non-pension
liabilities. None of the five largest states—California,
Texas, New York, Florida and Illinois—had put aside money for
non-pension benefits as of FY 2006.
- Per-capita costs for retiree health care and other benefits
range from less than $200 in North Dakota, South Dakota and Wyoming
to more than $5,000 in Delaware, Hawaii and Connecticut. The report
notes that per-capita statistics do not tell the whole story,
because they do not take into account state differences in wealth
or ability to pay the bill.
- Eleven states face long-term liabilities in excess of $10
billion. The states include New York at $50 billion, California at
$48 billion and Connecticut and New Jersey at nearly $22 billion
each.
Promising approaches
“Promises with a Price” finds that while there are no
quick and easy solutions, states can take steps to reduce their
liabilities. For example, West Virginia reduced its long-term bill
coming due for its non-pension benefits by more than
half—from an estimated $7.8 billion to $3.4
billion—after setting up a trust fund for payments and
adopting several other reforms.
“States have the means to control their destinies. They just
have to have the political will to do so,” said Katherine
Barrett, co-author of the report. “For a state to succeed, it
must use reliable data and good planning, carefully analyze whether
proposed new benefits are affordable, and, above all, do its best
to make full payments each and every year to reduce the long-term
cost.”
According to the report, a range of promising approaches are in
play across the country. Among them:
- At least five states—including Ohio, Washington and
Oregon—offer hybrid pension plans that combine elements of
both defined benefit and defined contribution plans.
- Some states are raising the retirement age and closing
loopholes within pension systems that allow employees to inflate
the amount they collect after retirement.
- For non-pension benefits, states are increasing premiums and co-pays and raising the number of years of employment required for lifetime or fully subsidized benefits, among other reforms.
- At least 13 states have set up irrevocable trusts to pay for
retiree health care in years to come.
The full report and fact sheets for each state are available at
http://www.pewtrusts.org/.
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© 2009 Penton Media Inc.
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