State Retirement Benefit Gap Getting Wider

Growing shortfall between resources and retiree promises risks benefit cuts and tax increases.

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Retirement benefits for state and local employees have come under enormous funding pressure because of the recession, slow recovery in tax receipts, and cutbacks in federal stimulus and support spending. The 2010 shortfall in public pension and healthcare benefits was nearly $1.4 trillion, according to a report from the Pew Charitable Trusts. That's the difference between what the states have on hand and the benefit obligations they have promised to pay retirees.

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The retirement prospects of public employees are, of course, directly affected by the adequacy of retirement benefit funding. But the health or weakness of state retirement benefits also affects a state's broader tax and spending environment. States with well-funded retirement systems are less likely to boost taxes on their residents than states with public retirement programs in poor financial shape. If you're nearing retirement, a state's fiscal health may play a big role if you're considering moving to a place.

Pew says 2010 is the most recent year when it could review data on all 50 states. It notes that nearly every state took steps in 2011 and 2012 to narrow its pension shortfall and that many acted on healthcare benefits as well. "States have responded with an unprecedented number of reforms that, with strong investment gains, may improve the funding situation they face going forward," Pew says, "but continued fiscal discipline and additional reforms will be needed to put states back on a firm footing."

Pensions. States set aside funds to cover future pension obligations. Pew says states' total funding shortfall for pensions was $757 billion in 2010. Closing that gap would mean states had achieved 100 percent coverage of their pension obligations. Pew and other experts say adequate pension funding should achieve at least an 80 percent ratio of pension plan assets to retiree payment obligations.

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Here are the 10 states with the highest percentage of funded pension obligations in 2010:

Wisconsin: 100 percent

North Carolina: 96 percent

South Dakota: 96 percent

New York: 94 percent

Delaware: 92 percent

Tennessee: 90 percent

Wyoming: 86 percent

Georgia: 85 percent

Nebraska: 84 percent

Texas: 83 percent

Here are the 10 states with the lowest percentage of funded pension obligations in 2010:

Illinois: 45 percent

Rhode Island: 49 percent

Connecticut: 53 percent

Kentucky: 54 percent

Louisiana: 56 percent

Oklahoma: 56 percent

West Virginia: 58 percent

New Hampshire: 59 percent

Alaska: 60 percent

Hawaii: 61 percent

Healthcare. Pension funding gets most of the attention in discussions about public employee retirements. But paying for retiree healthcare benefits has become a bigger financial problem. There is no benchmark for healthcare-plan adequacy. States fund most of their healthcare benefits out of current revenues. So does the federal government, in the areas of Medicare and Medicaid payments. But Uncle Sam can and does run enormous budget deficits. States can't do that.

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The average funding ratio of state assets for retiree healthcare is only 5 percent of cumulative benefit commitments, Pew says. And they are falling further and further behind each year in funding adequacy.

States should have set aside $51 billion in 2010 to pay for that year's growth in retiree healthcare commitments, Pew says. But they set aside only a little more than $17 billion, or 34 percent. Their cumulative funding shortfall in 2010 was $627 billion.

As healthcare expenses continue to rise, Pew notes, those states with little or no money set aside for retiree healthcare expenses are more at risk of future financial problems.

Here are the 10 states that have set aside the highest percentage of their retiree healthcare commitments:

Arizona: 69 percent

Alaska: 50 percent

Wisconsin: 38 percent

Ohio: 32 percent

Oregon: 31 percent

North Dakota: 30 percent

Utah: 22 percent

Kentucky: 15 percent

Colorado: 14 percent

Idaho: 12 percent

Meanwhile, 17 states have set aside no money for retiree healthcare benefits and thus fund all payments from current revenues: Arkansas, Connecticut, Florida, Hawaii, Iowa, Louisiana, Minnesota, Mississippi, Montana, New Jersey, New York, Oklahoma, Rhode Island, South Dakota, Tennessee, Washington, and Wyoming.

Meanwhile, Pew also mentioned several states with large healthcare liabilities that have set aside very small amounts of money and clearly face payment challenges. These include California ($77.4 billion retiree healthcare liability), Texas ($56 billion), Illinois ($43.9 billion), and Georgia ($19.8 billion).