June 19, 2012 12:51 am

Pensions gap widens for US states

The funding gap for the retirement benefits of US public workers has risen as cash-strapped states fail to contribute enough to these schemes to offset investment losses suffered in the financial crisis, according to a widely watched annual report from the Pew Center on the States.

For fiscal 2010, the most recent data available for all states, the shortfall rose to $1.38tn, up 9 per cent from fiscal 2009. State pension plans accounted for more than half of the shortfall, with only $2.31tn set aside to cover $3.07tn in long-term liabilities. Retiree healthcare and other non-pension benefits accounted for the remaining $627bn gap.

Public pension gaps have become an issue of concern for states in the last few years. Stock market losses during the financial crisis exacerbated what had been chronic underfunding of retirement promises by many states. US states, struggling with lower revenues since the recession, also have failed to make high enough contributions since.

Unique accounting methods have further clouded the situation, including rosy assumptions for returns and methods that allow funds to “smooth” investment gains and losses over time. Some observers believe pension shortfalls are far worse than the data the states provide shows and that was used in the Pew study.

The Governmental Accounting Standard Board next week will vote on changes to the way pension funds are calculated, which some market participants say could reveal these higher unfunded liabilities.

A “healthy” pension system is often defined as being 80 per cent funded, Pew said. In 2010, 34 states were below the 80 per cent threshold, up from 31 in 2009 and 22 in 2008. Only one state – Wisconsin – was 100 per cent funded. Connecticut, Illinois, Kentucky and Rhode Island ranked the worst, with funding under 55 per cent.

In an effort to reduce these shortfalls, almost every state has pushed for changes to their retirement benefits in recent years against staunch resistance from public sector unions. Not all of these changes are reflected in the Pew data given the time lag.

Between 2009 and 2011, 43 states enacted benefit cuts, increased employee contributions or both. The most sweeping changes were enacted in Rhode Island which will cut benefits for new and existing employees and created a new plan that will involve greater contributions from workers.

Some of the changes states are trying to roll out have faced or will face legal challenges brought by unions.

The study was based on 233 pension plans and 166 other post-employee benefit plans.

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