POSTED: 1:30 a.m. HST, Jun 19, 2012
SPRINGFIELD, Ill. » As the recession took its toll, many states diverted scarce money away from pension plans to pay for more immediate concerns, and the amount of new costs that states will owe the public retirement funds in the decades ahead ballooned to $757 billion, according to a study released Monday.
The Pew Center on the States found that 34 states failed to maintain safe levels of money in the pension funds, which most experts agree is about 80 percent of long-term obligations. Four states — Connecticut, Illinois, Kentucky and Rhode Island — didn't even have 55 percent of the money they'll need in the long run.
Hawaii has funded just 61 percent of its $18.5 billion pension obligation for public sector workers — the 10th worst in the nation. Hawaii also has a $14 billion retiree health care liability that is unfunded.
Wes Machida, administrator of the State of Hawaii Employees' Retirement System, said, "Over the past couple of years the board of trustees has been initiating legislative proposals to deal with the significant and escalating pension liabilities."
Total public sector pension liability and percent funded:
On July 1, the state will enact pension reform for new members, including lower benefits and a requirement to work longer. New hires also will be required to contribute more — between 8 percent and 14.2 percent of income — to the pension fund. The previous range was 6 percent to 12.2 percent.
The total gap between the money all states had available and what they will have to pay out in the decades ahead reached $757 billion in 2010, the most recent year for which figures are available. That was up 9 percent from the year before, according to the study titled "The Widening Gap Update."
The Pew Center found most states were trying to deal with the funding gap, either through cutting benefits for future employees or requiring workers to pay more of their earnings into their retirement funds. Some went after benefits for current employees, triggering court battles. States also adopted more conservative estimates for what they will earn on investments down the road.
Pensions aren't the only retirement problem. States also faced a $627 billion shortfall in health care services for retirees. Essentially, for every $1 they will eventually have to pay out in health care, states had set aside only 5 cents.
"So why should Americans care about these funding gaps? Because the larger they are, the higher the cost to taxpayers today and for many years to come," said David Draine, a senior researcher for the Pew Center on the States.
Nationwide, about 22.5 million public workers fall under a state pension plan. When states fall behind in their retirement contributions, they will have to come up with even more money later to make up the difference. In addition, pension and retiree health costs are growing, driving up state expenses even more. That leaves states less and less each year to spend on education, public safety and other government services.
While the new report looks at figures from 2010, pension expert Robert Rich said there is no reason to think the situation has improved significantly.
Rich, executive director at the University of Illinois' Institute of Government and Public Affairs, stressed that the recession was not the chief cause of the pension problem, although it contributed by eating away at the value of investments.
For years, states failed to pay their full share of pension costs, he said, so the problem won't be wiped away if the economy improves.
"It took us a long time to get into this hole, and it's going to take a long time to get out of it," Rich said.