State Pension Problems Still Getting Worse

Map credit: Pew Charitable Trusts

Another year, and another analysis by the Pew Charitable Trusts on the deteriorating condition of U.S. states’ public employee pension plans. Drawing on data from 2016, Pew concludes that despite scattered actions by the 50 states to shore up their pensions, the funding gap only got worse.

In 2016, the state pension funds in this study cumulatively reported a $1.4 trillion deficit—representing a $295 billion jump from 2015 and the 15th annual increase in pension debt since 2000. Overall, state plans disclosed assets of just $2.6 trillion to cover total pension liabilities of $4 trillion.

There is considerable variability between the states, however. The funding ratio (assets as a percentage of liabilities) ranges from 99% for Wisconsin, which is in fine shape, to 31% for Kentucky and New Jersey, which are in deep doo-doo. The national average is 66%. Virginia is in modestly better condition than the national average with a funding ratio of 72%. Our net pension liability in 2016 was “only” $25.3 billion.

Admittedly, 2016 was a tough year in which state pension plans generated a mere 1% return on their investments, significantly short of the 7% to 7.5% returns that most plans are predicated upon. (Virginia assumes a 7% return.) Investment performance shined last year, which could improve 2017 performance when Pew gets around to calculating it a year from now.

However, investment returns are likely to become more volatile, Pew notes. As the gap between the return on 30-year Treasury bonds and equity returns has widened over the past two decades, pensions have shifted assets to riskier investments in the hope of generating a bigger payback.

The share of public funds’ investments in stocks, private equity, and other risky assets has increased by over 30 percentage points since 1990—to over 70 percent of the portfolio of state pension plans. As a result, pension plan investment performance now tracks equity returns more closely than bond returns.

That’s great news when the stock market goes up, as it did last year. But when interest rates rise and market multiples shrink, as is happening this year, pension funds are vulnerable to setbacks in stocks, private equities, and interest-sensitive real estate investments.

Pew has developed a set of analytical tools that allow a more penetrating look at a state’s pension posture. One of those is “net amortization as a percentage of payroll for each state.”

There are two ways for states to increase the assets in their pension plans. One is to earn a higher rate of return on its investment portfolio. The other is to contribute more (in employee contributions and government contributions) into the plan.

With the “net amortization” metric, Pew assumes that the pension plan earns the assumed rate of return (even though that assumption isn’t always justified). The idea is to determine whether state/employee contributions are putting in enough to cover new benefits earned that year. States the study: “Plans that consistently fall short of this benchmark can expect to see the gap between the liability for promised benefits and available funds grow over time.”

Some states are doing a horrible job — Kentucky, New Jersey, and Illinois are ticking time bombs. Kentucky paid in only 41% of its benchmark in 2016, and New Jersey only 33%. The national average was 88%. Virginia looked pretty good by comparison, paying in 101% and whittling down its net liability by one whole percentage point!

Pew also looks at what it calls “operating cash flow” — the difference between financial outflows (primarily benefit payments) and employer/employee contributions expressed as a percentage of assets at the beginning of the year. “A plan with an operating cash flow ratio of 3 percent, for example, would need to achieve investment returns of at least 3 percent that  year to keep assets from dropping.”

In total, state pension plans paid out $214 billion in pension benefits in 2016, and took in $37 billion in employee contributions and $93 billion from employers. Dividing the cash flow by the total asset value of $2.6 trillion results in an average operating cash flow ratio of  3.2 percent for states in 2016.

New Jersey and Kentucky were the worst performers, with negative cash flow exceeding 4%. Kansas fared the best. Indeed it was the only state in the country to show a positive cash flow. By this metric, Virginia was the ninth best performer — we had a negative cash flow ratio of only 1.8%.

Bacon’s bottom line: State pensions are in bad shape, and they’re getting worse. Virginia is no exception to the broader trend. If there’s any consolation, several other states are likely to hit the wall before we are. A pension crisis looks almost unavoidable for Kentucky, New Jersey, and Illinois — and by “crisis,” I mean a default on its pension obligations. We’re talking Boomergeddon, baby.

Hopefully, the calamities of others will serve as a notice to Virginia that our pension problems are real. Given enough warning, maybe we can get our act together.

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29 responses to “State Pension Problems Still Getting Worse”

  1. LarrytheG Avatar

    Well.. like people .. some states have responsible pension funding practices and some don’t but what are the real consequences of screwing up the state pension?

    The rating agencies will surely ding their credit rating – which, in turn, makes it harder and more expensive to borrow money but beyond that – .. what?

    States don’t go bankrupt and get bought up by hedge funds who sell off their assets.. .. right?

    They most often end up as bigger versions of Petersburg, Va ? (that’s a question).

    And for the States with AAA credit ratings like Virginia – what does it mean when they have not fully-funded their pension obligations? Apparently the credit agencies are not upset…right?

    Remember the US Postal service? Congress DID REQUIRE them to fully-pre-fund their pension obligations.. and the result of that was a an annual operating loss and guess who pays for that loss? Hey.. that loss is paid for by Uncle Sam – using deficit dollars!


    Finally – anyone who listens to local Boards of Superviors knows two things. Number 1 is that in most cases (not all) they let the state take care of their employee pensions and just pay the State some amount of money – that varies according to how the stock market is performing… in down years, localities have to send more money.

    Last – consider the phrase OPEB which until recently meant little to hardly anyone but NOW it’s the 600 lb gorilla for locality budgets because GAPP has decreed that OPEB is an unfunded liability that must be reported as such in CAFRs… I’ll leave the acronym OPEB for homework for those that don’t know what it is.

  2. Inthemiddle Avatar

    States, like other employers, face a simple decision. Fully fund your pension liabilities or reduce your liabilities to a level that you can fully fund. Failing to fund those liabilities is simply irresponsible.

    Companies have moved to reduce their liabilities by moving from defined benefit plans to to defined contribution plans. Governments should followi their lead.

    The downside for employees, of course, is that their employer is not responsible for guaranteeing their investment. On the upside, employees are not stuck with their employer just to keep their pension.

    1. djrippert Avatar

      Failing to fully fund pension liabilities is irresponsible. Beyond that, it invalidates the frequent frequently heard high pitched chirping from many state politicians regarding the fact that their state (unlike the federal government) must have a balanced budget.

      1. Rowinguy1 Avatar

        Excellent point, DJR!

  3. LarrytheG Avatar

    I’d actually agree with that – and take it one step further – portable health care… so that employees control their own destiny – not employers.

    Just put the same rules about guaranteed acceptance on ALL insurance companies – not just those who provide employer-provided.

    The basic proposition for most state and local jobs is that people don’t the gold-plated retirement benefits in place of a better paying job.

    But if we actually provide a framework for people – including teachers to actively go into the job market and seek the best wages they can – what happens to localities in terms of attracting talented workers?

    Watching this in my own country – even now – even with good defined benefit plans – they have trouble attracting good quality (talented) staff.. and are having to offer higher wages.

    Right now, the State of Virginia has a shortfall in teachers… AND at least where I live – teachers are already getting defined contribution pensions – 403(b) pensions…

    to this point – a lot of govt has offered high-dollar pensions to make up for low-dollar salaries… if you convert those pensions.. you’re going to have to offer higher salaries.

  4. Steve Haner Avatar
    Steve Haner

    Not my area of expertise but my understanding is that 100 percent is not necessarily the right target. The bottom line on the AAA rating is that the bond agencies know that VA 1) has moderate state taxes and those could be raised in a pinch (and will be, before retired cops don’t get their pension checks), 2) is moving (perhaps too slowly) to a defined contribution model and 3) is not a state where public employee unions have political control.

    But when some of those other states collapse, it will be a problem for all of us. And the VA General Assembly is hardly immune to the temptation to fatten pensions and other benefits, or create special tax treatments for favored classes of voters. It always bears watching.

  5. TooManyTaxes Avatar

    It’s my understanding that, several years ago, the GA passed & the Governor signed legislation that converted VRS to a combined defined benefit and defined contribution plan for new hires. Conceptually this is like FERS.

    1. LarrytheG Avatar

      Well I DO KNOW someone who retired as a teacher and she got a pension plus a 403b IRA… and once 65 Social Security.

      I think this is basically like the Federal FERS pensions work.

      On the AAA rating….perhaps contrast what differentiates states that have AAA ratings with ones that don’t… does the pre-funding of pensions affect the ratings or is it other stuff? My understanding is that debt and liabilities DO affect the ratings.

    2. LarrytheG Avatar

      “Beginning in 2014, newly hired teachers and state employees, except for public safety employees, will participate in a new hybrid DB/DC plan instead of the traditional DB plan. The pension portion will provide a 1% multiplier for teachers and state employees, funded by the employer and the employee. The defined contribution component will include mandatory 1% employee and employer contributions, plus the employer will match voluntary contributions of up to 4% from the employee’s pay, and with a 100% on the first 1% and 25% match for each additional 0.5% of pay.”

      1. LocalGovGuy Avatar

        As I post whenever this comes up…There’s a percolating sentiment in the actuarial community that the entire “public pension crisis” is overblown with some rare exceptions.

        The reality is that outside of teachers, Gen X and Gen Y workers simply aren’t sticking around for 30+ years in any jobs (public or private) anywhere near the numbers of the boomers. Thus, once the boomer wave is over (and it’s cresting now), a lot of these liabilities will substantially shrink.

        It is also worth pointing out that the VRS reforms now prohibit “early retirement” before 60 except for police and fire. Thus, after the boomer wave, you’re not going to see your neighbor retire from the state at 55 and receive more than half of his/her salary. More likely, they’ll retire at 60 and with a 1% multiplier, probably retire at a third of their salary.

        1. Interesting. If you come across any publications that document these trends, please let us know. Or email me the URL.

          1. Reed Fawell 3rd Avatar
            Reed Fawell 3rd

            Yes, very interesting indeed

            But lets assume its correct. There are a least two major problems. First, we have only begun the Boomer run towards sucking public reserves dry. The outer edge of incoming Boomers is only 71 years old today. On average, he or she has got many years to live. So do almost another 20 years of Boomers who have yet to arrive at retirement, and then many of them will live yet another 20 years beyond that.

            Assuming, however that we outrun that huge threat, then might not the solution found by the death of a generation, leave succeeding generations with a solution that is far worse than the original problem. The majority of generations coming after the Boomers who are forced to live Cradle To Grave with no security at all, no stable good jobs worth having within their reach, much less affording them security for their future, whether in retirement or otherwise.

  6. Inthemiddle Avatar

    LarrytheG, we seem to be in violent agreement.

    The solution to retaining professionals in government (like our teachers) is to pay them adequately in the first place, not to promise generous pensions that will be underfunded. Either way, taxpayers have to pay for the services provided.

    Back in the 80’s, a leading economist noted productivity would increase more slowly in industries that require a relatively fixed level of human capital – for example, teachers, firefighters, police officers. As a result, there would either be a growing disparity between incomes in those fields compared to incomes in industries that had greater productivity gains. Or employers of those services (taxpayers) would have to contribute a relatively larger share of their income to those professionals to keep their incomes competitive.

    Regarding health benefits, we’re in total agreement – companies should not be in the business of selecting health insurance plans for their employees. And employees should not be forced to choose between staying with a poor employer and losing their healthcare.

    In fact, I found the argument that Obamacare denied individuals their right to choose their healthcare rather misleading. Most individuals employed by mid-sized and large organizations don’t choose their health care – their employers choose. If you work for an organization led by a fundamentalist Christian, you don’t get to choose a health plan that includes contraception.

    The solution is to eliminate all incentives for employers to provide health insurance, and put everyone in the private market. We would see a major overhaul in how healthcare is financed, and individuals would have real choices.

  7. LarrytheG Avatar

    We ARE in violent agreement of MOST ALL of it.. with one quibble about productivity – which I think Education should be embracing.
    Teachers will always be the number 1 need and priority but technology used “right” can focus teacher labor on things that only teachers can do … and not machines…

    A teacher CANNOT be one-on-one simultaneously with a class of 20 but she/he CAN be one-on-one with the ones that need more than computerized tutoring… while the ones that can learn via computerization … are…in the meantime.

    I’m afraid this is one of the few ways we are going to be able to actually help kids in low-income neighborhoods where the schools are not very good, in no small part, because they cannot attract enough high quality human teachers.

  8. LarrytheG Avatar

    Acellus is an example of the newer technology available to schools:

  9. TooManyTaxes Avatar

    Removing employer-provided health care benefits would result in a substantial reduction in the income of those employees who have the benefit. And, NO, they won’t receive dollar-for-dollar replacement income.

    1. LarrytheG Avatar

      where they do or not – is a separate issue – the point is that everyone who works should have access to health insurance – as an equity issue.

      On your W2 form if you get health insurance in Box 12 – Code DD documents how much money the employer spent on health insurance. You just give that money to the employee and let them go shop for health insurance on the market.

      Two good things will happen. 1. employees will be free from job-lock and 2. – people actually shopping for insurance specific to their own needs rather that getting what the employer choses will engender competition.

      Our current system is inequitable and harms most everyone – even those who get employer-provided.

      1. TooManyTaxes Avatar

        In order to keep people with employer provided health insurance whole, you’d have to gross up the amount in Box DD by the amount of state and federal income tax imposed on that amount. Or you could keep the tax-free status for employer contributions and allow the employees to make purchases in the market.

        But just try this and see what reaction you get from the people from whom you want to take away their employer-provided health insurance in the name of “equity.” Most people who would be affected would not trust the employer payment to continue or that the government will keep the amounts tax free.

        If you want to discuss equity, why should the bulk of taxpayers who don’t have a defined benefit retirement plan pay higher taxes to fund defined benefit retirement plans for government employees? A fairness argument would strongly suggest the amounts of plan assets be put in individual employee’s accounts in a defined contribution plan. That way state and local government employees will be free from job-lock and 2. – people actually shopping for retirement benefits specific to their own needs rather that getting what the employer choses will engender competition.

        There is no good policy reason to favor health insurance over retirement benefits.

    2. LarrytheG Avatar

      The other thing not generally recognized in the talk about pension obligations is OPEB obligations which belong to the locality and are now required to be reported as a liability for the future years “owed” and not yet funded in the present year.

      OPEB basically is health insurance and other fringe benefits that are not pension and in many localities – it’s a large item in the budget. I would imagine that Fairfax has a large OPEB obligation.

  10. Rowinguy1 Avatar

    Sorry to go off the topic here, Jim, but you’ve written a number of articles about the so-called “Alien invasion” of Prince William County by non-citizen voters. I’m wondering if you are planning to follow up on this:

    1. LarrytheG Avatar

      Jim has shown a willingness to let others post quest columns. Perhaps he will let you! I’d sure like to read it!

      1. Any time!

        (Although I do feel compelled to write a follow-up. I’ll do so if there’s no other pressing news in the next couple of days.)

        1. Rowinguy1 Avatar

          I don’t know any more about it than what I read in that article linked above, which I happened upon this morning. It just recalled to my mind some of the previous articles I’d seen here. Looking forward to your follow-up, Jim.

  11. One problem? If you don’t pay people pensions and they don’t save, the govt. gets the bill when they’re older. It will end up being more expensive. Either that, or you dump Medicaid unless people can pay for it. Dump EMTALA. I can see it coming.

    1. TooManyTaxes Avatar

      EMTALA’s days are numbered.

      1. LocalGovGuy Avatar

        No, EMTALA will go nowhere as long as the GOP opposes universal health care. It provides an easy excuse not to adopt any form of universal care. In the past 9 years, the GOP has dug in its position against the ACA and any form of universal care by constantly stating, “Nobody is actually refused treatment. People are getting care. Etc., etc.” It’s very convenient to say that so long as EMTALA is around…Not sure what they would say if EMTALA disappeared.

      2. LarrytheG Avatar

        EMTALA days are numbered only in the addled brains of those who seem quite willing to watch people die on the streets like they do in 3rd world countries.

        On a poll – I’d put that number at about 10% or so..

        And if you’re gonna do that – what’s the excuse for keeping Medicare Part B for seniors? That’s also a half billion dollars subsidy for people – who did not save for their retirement health care… they just expected Medicare to be “provided”…

        There is not a single person in Congress – that advocates for the repeal of EMTALA not even the far right “freedom caucus” nutburgers…

        Americans .. most of them.. are not going to watch others die without ER care.. but ironically – they’re willing to pay twice as much for ER care rather than primary care for those same folks.

        1. TooManyTaxes Avatar

          If you expand Medicaid coverage so that single low-income workers are covered, why do you need EMALTA? I thought the argument from the left was expand Medicaid and substantially cut ER usage among lower–income people!!! And phasing out EMALTA would motivate younger and healthier people to purchase health insurance.

          But then again, maybe the real goal of the health care lobby is simply to channel more money into health care.

          1. LarrytheG Avatar

            Why – because people still don’t have coverage or enough coverage. And there are still political forces that want to kill the Medicaid Expansion all-together.

            The proper way to “kill” EMTALA is to implement the rest of MedicAid ..THEN take a look at who is still going to ERs for their care – then address that area – THEN phase it out.

            You don’t do it on the front end and then find out there are millions that are denied care that we had not fully considered.

            You will find that regular insurance does not fully cover a lot of ER costs.. people STILL end up owing thousands of dollars.

            Would you just require people to pay what their insurance will not cover before they get treated?

            See the problem with “Conservatism” is that it is so fueled by ideology that they want things done whether it makes sense in a practical manner – no matter… that’s not a way to go about anything.

            You don’t kill something first then figure out what got broke later…

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