Of the three types of long-term liabilities that states regularly report on, unfunded pension obligations are the biggest in most states, followed by unfunded retiree health care and outstanding debt. Nationwide, unfunded pension liabilities — the gap between the amount needed to pay for promised pension benefits and the amount set aside for them — grew to nearly $1.3 trillion in fiscal year 2022, largely because of lower-than-expected investment returns.
The pension funding shortfall increased almost 17 percentage points from the previous fiscal year, to nearly 66 percent of states’ own-source revenue (all taxes and fees levied and collected directly by the state in 2022). By contrast, the burden from outstanding debt declined as a percentage of state revenues in fiscal 2022. The third major source of long-term state liabilities, unfunded retiree health care, fell in fiscal 2019 (the most recent year for which The Pew Charitable Trusts has compiled 50-state data).
Pension shortfalls are typically caused by insufficient funding and underperforming investments, among other factors. It is critical that policymakers carefully consider all of their states’ existing obligations when assessing how much additional debt to take on.
Trends in Unfunded Liabilities
In fiscal year 2022, losses on stock market investments fueled a jump in the funding gap for state pension plans. Unfunded pension commitments as a share of all states’ own-source revenue have grown by nearly 23 percentage points since fiscal 2008. Investment losses during the Great Recession of 2007-09 lowered plan assets, causing a rise in unfunded liabilities. In the aftermath of the Great Recession and throughout much of the ensuing recovery, the funding gap continued to grow as a result of a combination of factors: insufficient contributions, lower-than-expected investment returns, pension funds making more conservative assumptions about future investment returns, and, in some cases, benefit enhancements that were not accompanied by sufficient funding to pay for the increased liability.
However, the 50 states’ combined debt burden declined in fiscal 2022 to its lowest point in 15 years. Outstanding debt as a share of own-source revenue dropped to 18.3 percent, nearly 7 percentage points below the fiscal 2008 level. After borrowing more heavily during the Great Recession, states kept their combined debt relatively stable, in dollar terms, because policymakers were cautious about issuing bonds. As with retiree health care, the share of outstanding debt relative to states’ own-source revenue declined, largely as a result of growth in revenue over the years, especially in fiscal 2022. States had a combined $326 billion of debt in fiscal 2022—a higher amount than in previous years — but the share as a percentage of revenue still fell because of an increase in total revenue.
A state-by-state review of unfunded pension liabilities as of fiscal 2022 shows that Illinois’ unfunded pension liability was the largest of any state at 197.2 percent of its own-source revenue, followed by New Jersey (162.4 percent), Mississippi (149.5 percent), Connecticut (147.6 percent) and Kentucky (134.9 percent).
In 34 states, unfunded pension obligations grew relative to own-source revenue from fiscal 2008 to fiscal 2022. Five states recorded increases of 60 percentage points or more in that time span: Alaska (increased by 93.1 points), New Jersey (up 77.9 points), Georgia (69.5 points), Florida (62.7 points) and Pennsylvania (60.0 points).
Sixteen states have decreased their unfunded pension liabilities as a share of own-source revenue since 2008. Oklahoma (53.4-point decrease), West Virginia (-38.2 points) and Oregon (-37.1 points) had the greatest declines.
Pension plan assets in fiscal 2022 exceeded what was owed in four states: New York, South Dakota, Tennessee, and Washington.
Changes in Annual Funding Needs
Nationally, the amount needed to adequately fund state pension plans in fiscal year 2008 was 5.9 percent of own-source revenue. That share increased to 7.8 percent in fiscal 2021 before dropping to 4.9 percent in fiscal 2022. The increase from fiscal 2008 to fiscal 2021 was driven by investment losses from the Great Recession, the need to make up for past contribution shortfalls, the adoption of more realistic assumptions, and changes in government accounting standards. From fiscal 2021 to fiscal 2022, the reduction in necessary annual pension contributions was due to strong investment performance in fiscal 2021, which improved the funding of public pension plans.
Subsequent investment losses in fiscal 2022 erased much of the fiscal 2021 increase. As a result, the contribution benchmark for pension plans is expected to rise when data for fiscal 2023 becomes available.
In fiscal 2008, more than half of states set aside less than what their actuaries had calculated was necessary to adequately fund public pensions, with a combined pension contribution of 5.3 percent of state revenue instead of the 5.9 percent that was needed. By 2013, the contribution amount recommended by plan actuaries had risen to 7.8 percent of state revenue; actual contributions likewise rose in that period, to 6.2 percent of state revenue, but remained short of projected needs.
In 2014, new accounting standards resulted in a contribution benchmark of 9.4 percent of state revenue to avoid increases in pension debt. Over time, policymakers significantly boosted the share of state resources going into public pension plans, with actual contributions for all 50 states catching up to the benchmark by fiscal 2019 and significantly exceeding it in fiscal 2022.
Managing this increase required fiscal discipline and tough choices, as the rise in contributions crowded out other spending priorities but meant that states were no longer collectively leaving the cost of unfunded liabilities to future generations.
States made less progress in meeting the contribution levels necessary to keep retiree health care debt from growing. In fiscal 2019, the most recent year for which Pew compiled the data, only 10 states met or exceeded the target: Arizona, Idaho, Indiana, Michigan, North Dakota, Oklahoma, Oregon, Rhode Island, Utah, and Wisconsin. The gap between the actual contribution and the benchmark was greatest in Texas, followed by California, New Jersey, and Illinois.
This story first published in Pew.org. Read the original here.
David Draine is a principal officer and Keith Sliwa is a principal associate with The Pew Charitable Trusts’ public sector retirement systems project; Joanna Biernacka-Lievestro is a senior manager and Riley Judd is an associate with Pew’s Fiscal 50 project.
