The Pew Center on the States is out with its annual snapshot of state pension and retiree health care funding, and it makes for grim reading.
First, a caveat: Pew’s numbers for Rhode Island are outdated – the state’s unfunded pension liability has jumped thanks to the Retirement Board’s vote earlier this month to lower its expected investment return rate. The figures won’t be finalized until next month.
Rhode Island’s pension system is now estimated to be 48% funded – that is, it has enough assets on hand to cover 48% of its promised pension benefits. If that 48% number had been used in Pew’s report, Rhode Island would edge out Illinois’ 51% and West Virginia’s 56% to have the most unfunded pension system in the country (though our new number is for 2009-10, not 2008-09 like those in the Pew report).
Of course, the reason Rhode Island’s unfunded liability is now worse than theirs is that the state is revising its expectations downward – Illinois and West Virginia might edge us out once again if they adopted similar assumptions. For the record, experts say public pension systems should be at least 80% funded. New York and Wisconsin’s systems were the only ones that were fully funded in 2009, according to Pew.
Rhode Island does get good marks from Pew for making its entire $320 million required contribution to the pension fund during the most recent fiscal year – many states opted not to put in the full amount mandated by their actuaries, but Rhode Island was one of 22 that did.
Pew said its review of how pension funds performed in 2009-10 “suggest[s] that while states benefited from better returns in fiscal year 2010, the legacy of the financial crisis – and the steady deterioration in the health of many public sector retirement benefit systems throughout much of the last decade – will remain an issue for years to come.”
Then there’s OPEB – the acronym for “other post-employment benefits,” primarily health care for retirees.
Rhode Island’s unfunded liability for OPEB is far smaller than for pensions – $788 million for OPEB vs. $7 billion ($7,000 million) for pensions – but it’s also a problem with which we’ve barely begun to grapple. The state’s OPEB fund was entirely unfunded – 0% – when Pew checked in, and the state only paid 62% of its required contribution in the most recent fiscal year. We’re far from alone in that, though; only seven states had put aside assets to cover at least 25% of their OPEB liability.
Pew’s researchers also offer a good explanation of how states benefit by keeping up with their pension contributions:
Just as failing to meet a monthly payment on a personal loan can result in higher payments down the road, a state’s failure to pay the annual bill for retirement benefits can mean it will have to pay more in the future. A comparison of New York and New Jersey provides a good example. Both states had fully funded pension plans in 2002. In subsequent years, the Garden State failed to make more than 60 percent of its annual contribution in each year and its funding gap grew to $46 billion.
The Empire State, on the other hand, continued to be disciplined about funding its annual bill. Today, New York has a $147 billion liability, compared to New Jersey’s $135 billion obligation, but its annual required contribution is $1.6 billion less. To put this in context, consider that New York increased K-12 education spending by $1.7 billion from fiscal year 2008 to 2009. New Jersey, meanwhile, reduced state education spending by $557 million during the same period.
One thing that strikes me in reviewing these numbers is that it’s not obvious why Rhode Island’s pension fund should be in such woeful shape.
Take New York. Albany is not exactly known for its squeaky-clean, goody-two-shoes approach to state government. Unions are strong there and Democrats dominate, just like in Rhode Island. Yet somehow New York has managed to maintain a fully funded pension system, while Rhode Island’s is mired below 50%. Why?
(map: Pew Center on the States)