10 States Where Pensions Are Running Out of Money

24/7 Wall St.

Corporate pensions, municipal pensions, state pensions — each category has funds that have run out of money and certainly many are running low. The fate of the UAW pensions was a critical part of the US bailout of the auto industry. Eventually, the unions received equity in Chrysler and GM, among other things. They are not the only large American companies with underfunded pensions; they are just the most recent and visible examples.

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Austerity has taken its toll across the country. The need to cut expenses has become acute in the public sector. Federal, state, and municipal revenues are down because of the recession and the related effect on real estate prices and personal and business incomes. The costs of services that each level of government provides have not fallen as quickly. Some cities and counties have become insolvent and are in the hands of state-appointed emergency managers. The states worst off financially are in such trouble that Congress has started discussions about whether a state bankruptcy would be legal.

As the financial obligations and access to capital for states and cities is debated, one remedy has already been taken almost universally — cost cuts. One of the areas governments have either tried to cut, or have been forced to, are the funds put toward pensions and health benefits for public sector employees.

The Pew foundation recently released its "The Widening Gap: The Great Recession's Impact on State Pension and Retiree Health Care Costs" document. It says that states have a cumulative retiree and health care shortfall of $1.26 trillion. Many states have also not made ongoing contributions at the rate that experts suggest to get their funds in line with the obligations of those funds. Pew writes, "States' own actuaries recommended that they contribute nearly $115 billion to build up enough assets to fully fund their promises over the long-term, but they contributed only $73 billion — or 64 percent of the total annual bill."

The Pew analysis is misleading because a pension's liability cannot be understood by an analysis of a single moment. A pension's capital level may have been hurt by the recession. Actuaries recommend how much money states need to put into funds each year to keep them at viable levels. Some states put in more than the recommended level, and some put in less. The rate at which people retire is fairly predictable, but in a large state it cannot be calculated with great precision.

24/7 Wall St. reviewed the pension funds of all 50 states collected by Pew as of 2009, the latest period when data is available for all of them. We looked for how much the most underfunded pensions were compared to the level that actuaries suggested in 2009. We also looked at the recommended amounts of annual contributions that each state made. 24/7 compiled a list of The Ten States Where Pensions Are Running Out of Money based on state pensions that are underfunded and which have a shortfall of the 2009 recommended level. A state that has a fund level at 70% of what's recommended and which only received 50% of the 2009 recommended contribution is worse off than one with a 90% funding level which received 90% of the recommended contribution. 24/7 Wall St created an index which takes both factors into account to identify which states are in the most trouble.

10. Pennsylvania

Pension Liability: $111 billion

Percent of Pensions Funded: 81% (17th highest)

2009 Actuarially Recommended Contribution: $2 billion

2009 Actual Contribution: 31% (lowest)

Pennsylvania's public retirement plans are 81% funded, which is a relatively high percentage compared to many other states. The state may be falling further behind, however. In 2009, the state made only 31% of the $2.4 billion in contributions recommended by state actuaries as being needed to fund long-term pension benefits. This is the smallest percentage among all the states. In 2010, contribution caps that do not expire until 2015 were placed on the funds. This means that the state cannot contribute more than half the amount actuaries say would be necessary to keep the fund solvent for all long-term payments.

9. Maryland

Pension Liability: $53 billion

Percent of Pensions Funded: 65% (11th lowest)

2009 Actuarially Recommended Contribution: $1 billion

2009 Actual Contribution: 84% (16th lowest)

Only 65% of Maryland's pension funds have money set aside for them, and the state's annual funding has decreased at a growing rate for the last three years. This decade alone, contributions by the state for its general pension fund grew by 39%. Over this same time period, however, state worker benefits increased by 59%. The state's pension liability, as of 2010, is $54.5 billion.

8. Colorado

Pension Liability: $55 billion

Percent of Pensions Funded: 69% (17th lowest)

2009 Actuarially Recommended Contribution: $1 billion

2009 Actual Contribution: 66% (5th lowest)

According to a story in the Denver Post, Sylvester Schieber, who is a consultant on pensions and a former chairman of the Social Security Board, says that Colorado's public pension plan is among the most generous in the country. Members of Colorado's Public Employees' Retirement Association, for example, receive an average of 90% of the salaries of employees who are still working and paying into the plan. The state currently has a pension liability totalling $54.5 billion. This year the state only paid 66% of its annual requirement.

7. Massachusetts

Pension Liability: $61 billion

Percent of Pensions Funded: 68% (16th lowest)

2009 Actuarially Recommended Contribution: $2 billion

2009 Actual Contribution: 66% (5th lowest)

Only 68% of Massachusetts' pension liabilities are currently funded. This is, however, only the 16th lowest percentage in the country. What makes the situation worse for the state is that in 2009, the most recent year on record, the state contributed only 66% of the recommended $2 billion, the fifth-lowest percentage in the country.

6. Kansas

Pension Liability: $21 billion

Percent of Pensions Funded: 64% (10th lowest)

2009 Actuarially Recommended Contribution: $660 million

2009 Actual Contribution: 68% (7th lowest)

The Kansas Public Employees Retirement System, or KPERS, projects a $7.7 billion payment gap between anticipated long-term revenues and the benefits due to retirees and current public employees, according to Bloomberg. In 2009, the state only paid 68% of the pension contributions recommended by state actuaries. Governor Sam Brownback recently predicted that the state will move toward a 401(k)-style pension plan for newly hired teachers and public workers to address the pension issues.

5. Oklahoma

Pension Liability: $35 billion

Percent of Pensions Funded: 57% (3rd lowest)

2009 Actuarially Recommended Contribution: $1 billion

2009 Actual Contribution: 77% (11th lowest)

Oklahoma has the country's third most underfunded public pension account. Only 57% of those benefits which have been promised to public employees are funded. The House of Representatives is currently considering a bill which would raise the age of state employees, hired after November 1st, at which they are eligible to start receiving pension benefits. The age of eligibility for the majority of state employees would change from 60 to 65, and it would change from 62 to 65 for teachers.

4. New Jersey

Pension Liability: $135 billion

Percent of Pensions Funded: 66% (12th lowest)

2009 Actuarially Recommended Contribution: $4 billion

2009 Actual Contribution: 36% (2nd lowest)

New Jersey's pension fund is already extremely underfunded, with just 66% of the necessary money contributed. To make matters worse, in 2009 the state only funded 36% of the amount of money recommended by state actuaries to keep long-term benefit promises. This is a huge change for the state, which as recently as 2002 had fully funded pension plans.

3. New Hampshire

Pension Liability: $8 billion

Percent of Pensions Funded: 58% (4th lowest)

2009 Actuarially Recommended Contribution: $263 million

2009 Actual Contribution: 75% (10th lowest)

New Hampshire is tied with Kentucky for having the fourth-lowest percentage of its pensions funded, just 58%. It also only paid 75% of its recommended contribution for 2009, the tenth-lowest percentage among the states that year. The New Hampshire Senate is currently considering a House-passed pension reform bill which will make newer employees contribute more money and work longer to get their pensions. Public employees will also face new caps on the amount they can receive.

2. Illinois

Pension Liability: $126 billion

Percent of Pensions Funded: 51% (lowest)

2009 Actuarially Recommended Contribution: $4 billion

2009 Actual Contribution: 71% (8th lowest)

Illinois has the emptiest pension fund compared to the other states, with only 51% of promised benefits currently funded. This is down from 54% the year before. Most experts, including the U.S. Government Accountability Office, recommend that states have at least 80% of their future pension costs accounted for. The state also contributed the eighth-lowest percentage of its recommended contribution for 2009 — 71%. So far, the state has sold $7.16 billion in bonds to help cover its 2010 and 2011 pension payments.

1. Kentucky

Pension Liability: $36 billion

Percent of Pensions Funded: 58% (4th lowest)

2009 Actuarially Recommended Contribution: $965 million

2009 Actual Contribution: 58% (3rd lowest)

The state of Kentucky's extremely underfunded pension account, coupled with its recent poor contributions to that account, place it as the worst-off state for pension funding. Kentucky only has 58% of its pension costs funded, the fourth-lowest percentage in the country. In 2009, the state contributed 58% of what was recommended for the fund by state actuaries, the third-lowest percentage in the country. Furthermore, Kentucky, which is one of the few states with 2010 pension data, paid only 54% of its pension liabilities last year. Two financial rating agencies, Moody's and Fitch, recently downgraded the state's bond rating due to its underfunded pension system.

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