Eight States Have Shortchanged Pensions

Eight States Have Shortchanged Pensions, Pew Study Finds
By MARY WILLIAMS WALSH

Eight states have been given failing scores for their pension management under a new grading system developed by the Pew Center on the States, which also found a $1 trillion gap between what all 50 states have promised their workers and what they have set aside.

The Pew center said on Wednesday that Alaska, Colorado, Illinois, Kansas, Kentucky, Maryland, New Jersey and Oklahoma had, in essence, failed its new test because they made no meaningful progress on keeping their retiree benefit plans sound. The worst case was Illinois, with a $54 billion gap between the cost of the benefits it had promised to pay retirees over the next 30 years and the amount it had set aside.

“Recessions and investment losses played smaller roles in the creation of this problem,” said Susan K. Urahn, the center’s managing director. “To a significant degree, the $1 trillion gap reflects states’ own policy choices and lack of discipline.”

The center based its measurements on data provided by the states as of June 30, 2008 — the most recent generally available — so any changes made since then would not have been factored into the scoring.

The data also did not capture the worst of the market crash, which occurred in the fall of 2008. Ms. Urahn said that as a result, the $1 trillion figure probably understated the problem.

By devising a simple scoring system for state pension funds, the Pew center was adding a new layer to the analysis now done primarily by credit rating agencies like Moody’s and Fitch. The agencies have increasingly tried to take stock of public retirement plans when rating how likely each state will be to pay its bonds.

Pension plans have grown so large and costly in some places that they can compete with bondholders for scarce state dollars. But ranking them is notoriously difficult because no two state pension systems are identical, and the variations can make comparisons extremely misleading.

The Pew center’s grading system took into account just a few simple factors, like whether states were making adequate contributions every year; how big any shortfalls were, relative to the size of the state payroll; and whether a state had managed to keep at least 80 cents on hand for every dollar it owed.

The center also looked at board effectiveness and the presence of any other retirement benefits, like health care. But it did not assign these factors points in its scoring system.

Nor did it try to determine whether some states were investing too aggressively, one of the pension world’s hottest controversies.

One of the main problems the center found was some states’ tendency, in lean years, to add too little money to their pension funds. Workers’ benefits kept growing while the contributions stopped.

Companies are required by law to put new money into their pension funds each year, but states and local governments are not. Instead, they receive nonbinding instructions from an actuary on how much to contribute.

If a state fails to contribute for a number of years, it can eventually fall so far behind that it has little chance of ever catching up. Many states appeared to have reached that point, the center found. The less they pay, the more their actuaries tell them to contribute the following year, and the problem snowballs.

In a news conference on Wednesday, Ms. Urahn noted that New Jersey had failed to contribute to its pension fund for more than a decade, and now the recommended yearly amounts had soared far beyond the state’s ability to pay.

“It is irresponsible to defer dealing with this problem, because the cost will only go up,” Ms. Urahn said. “And in the short term.”

New York State, by contrast, has not strayed far from its actuary’s instructions. So even though New York has been through an embarrassing pay-to-play pension scandal, its fund has not fallen behind.

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