Pension Crisis Threatens Financial Health of States

Washington, D.C.—State employee pension systems are facing severe shortfalls, and these growing liabilities threaten to drive many states deeper into the red. This is according to “State Pension Funds Fall Off a Cliff,” a new 50 state study co-authored by Dr. Barry Poulson of the University of Colorado and Dr. Arthur P. Hall of the University of Kansas.

The report, published by the American Legislative Exchange Council (ALEC), the nation’s largest individual membership association of state legislators, shows that as of 2006, states have accumulated nearly $360 billion in unfunded pension obligations. However, the authors warn the problem is even worse, as investment losses from the recent economic downturn have not been fully realized in the official government statistics.

A sampling of data from 2008 reveals much trouble ahead if states do not undertake fundamental reform of pension systems. Illinois comes in with the worst funded pension plan in the nation at 46.1 percent. Private defined-benefit pension plans are deemed to be “critical” if the funded portion of the plan is less than 65 percent.

“The underfunding of public pension plans has become the 900 pound gorilla in the area of state budgets,” said State Senator Jim Buck of Indiana, Chair of ALEC’s Tax and Fiscal Policy Task Force. “If legislators do not properly address the crisis in public pensions, it will make current budget problems in the states look trivial.”

The authors of this study conclude that the first step towards real pension reform is to increase transparency of unfunded pension liabilities by meeting the guidelines established by the Governmental Accounting Standards Board (GASB). According to the authors, the only viable long-term solution is to replace current defined-benefit plans with 401(k) style defined-contribution plans for new employees.

The full report is available for download at www.alec.org.