States of Bankruptcy

Part I: The Coming State Pensions Crisis

Dec 08 2011

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While private businesses have shifted away from defined-benefit retirement plans and toward defined-contribution retirement plans in recent decades, virtually all state and local government employees still participate in defined-benefit plans.  These plans are funded by contributions from employees as well as the government (i.e., taxpayers).  In 2010, employee contributions to state and local pension plans represented 30% of total contributions while taxpayers were responsible for the remaining 70%. Even if the contributions that state and local governments and their employees make to defined-benefit pension plans and the investment income such contributions generate fall short of the funds necessary to pay promised pension benefits, state and local governments are nonetheless required to pay promised benefits in full by either raising taxes or cutting other spending.  While no large state public pension fund has yet to run dry and test what would happen in the absence of available pension assets that will soon change as a number of plans are projected to run out of money in just over five years based on private sector accounting standards.

Deterioration in state and local government pension plans began in the late 1990s when high investment returns during the stock market bubble made pension plans appear fully or even over-funded.  As the stock market boomed, many states and localities reduced their contributions, increased benefits, and goosed their assumptions going forward.  The bursting of the stock market bubble and, later, the housing bubble, caused significant deterioration in the financial status of state and local government pension funds.  Based on data from the Pew Research center, the average state pension funding level (the
percent of promised benefits that are projected to be payable by existing assets) declined from 98% in 2000 to 76% in 2009.
 
Unfunded Pension Liabilities as percent of state gdp
 
 
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