The gap between what states owe their retirees and what they’ve set aside to pay them has grown to at least $1.38 trillion, according to the latest study from the Pew Center on the States.

The report, based on data from the 2010 fiscal year, shows the gap is up about 9 percent compared to FY 2009 data and up 38 percent compared to data from FY 2008.

For advocates of pension reform, the study is likely to serve as the latest salvo in the debate over public sector worker benefits. States like Rhode Island and Utah have enacted major reforms to their pension systems in recent years, as have cities like Atlanta, San Diego and San Jose, Calif.

On a conference call with reporters Monday Pew researchers compared states to consumers that rack up new purchases on credit cards while only making the minimum payment on existing balances.

“While the economy and state revenues are improving, states are still struggling to manage the bill coming due for promised benefits," said David Draine, senior researcher, Pew Center on the States.

The report finds that state pension plans have $2.31 trillion set aside to cover $3.07 trillion in obligations, leaving a gap of about $757 billion. States have set aside only about 5 percent of the $660 billion in non-pension benefits – namely retiree health care – leaving a $627 billion gap in that pool.

Generally, when it comes to current employees, states have more flexibility making reforms to retiree health plans than they do in making changes to pension programs.

Meanwhile, the shortfalls are affecting a growing number of states. Most experts say a healthy pension system is about 80 percent. In 2010, 34 states were below that threshold, compared to seven in 2000.

But Keith Brainard, research director for the National Association of Retirement Administrators, says the situation may be improving. The study does not reflect reforms made by states in recent years because Pew used data from FY 2010, the most recent year for which figures were available on all states. But the overwhelming majority of states have made reforms of one type or another to their pension systems, and most of those took place after that time frame.

From 2009 to 2011, 43 states enacted reforms to their pension plans like increasing the minimum age and years of service needed to retire with a full pension; requiring larger employee contributions; and limiting annual cost-of-living increases, among other reforms.

According to Pew, about $6 of every $10 in pension funds come from investment earnings, with the government and its employees paying the rest. But in 2008, when the recession hit, those pension investment funds suffered losses of 25 percent, and they have not yet made up those losses.

Brainard says the actuarial data that states rely on to know the condition of their pensions lags behind the fiscal year, so the figures in the Pew report are more of a reflection of the pensions' condition in FY 2009. That was the heart of the recession, when markets weren’t performing strongly.

The report didn't mine words when assigning blame for the situation, saying state governments "have not held up their end of the bargain" when they should have been making payments into retirement systems. The authors write:

Policy makers were able to make 78 percent of the recommended contribution toward their states’ pension plans but set aside just 34 percent of what actuaries recommend should be set aside to pay for retiree health benefits. While it is currently difficult for states to make contributions toward their retirement systems, given the drop in revenues and fiscal stress from the recession, many of these states also failed to make the recommended contributions when times were good

The issue is one that should concern everyday citizens, since the gaps in retiree benefits will have to be plugged with state funding that could otherwise be used for other purposes. The study found that states spent about the same amount on pensions and retiree health care in FY 2010 -- about $124 billion -- as they did on transportation.

Pew's study is based on 233 pension plans and 166 post-employment benefit plans.

The figures are based on states' own actuarial assumption about how much they expect their pension systems to earn -- typically 8 percent annually. But some have criticized those assumptions as being overly optimistic. Using a conservative estimate -- a tactic championed by advocates for pension reform -- the gap would likely appear dramatically larger.

A recent study of 126 pension plans by the Center for Retirement Research at Boston College found that, in FY 2011, they had a funding ratio of 75 percent, but that figure would be 50 percent if figures were reported using the more conservative standard, known as the riskless rate.

Seven states had pension systems that were more than 90 percent, including Delaware, New York, North Carolina, South Dakota, Tennessee, Washington and Wisconsin

Eight  states' pension systems were less than 60 percent funded. Those include Connecticut, Illinois, Kentucky, Louisiana, New Hampshire, Oklahoma, Rhode Island and West Virgina.

Public Sector Pensions Map

The map below shows percentages of pension system liabilities funded for each state for fiscal year 2010. Click a state for additional info.

Pension Liability Funded, FY 2010

<60% <70% <80% <90% ≥ 90%


Source: Pew Center on the States