STATE PENSIONS BECOMING FEDERAL ISSUE
May 21, 2010
Illinois used to have a plan to pay off the gaping shortfall in the pension funds that pay retired teachers, university employees, state workers, judges and politicians, says Dan Long, director of the Commission on Government Forecasting and Accountability, the non-partisan auditing arm of the Illinois state legislature.
Back in 1994, the state laid out a proposal that would have paid off most of what was then a $17 billion gap by 2011. But Illinois could not stick to the plan, says Long.
However, with financial year 2011 less than six weeks away, the pension arrears of the 1990s look quaint, says the Financial Times:
- Instead of a balanced system, the state faces unfunded liabilities of about $78 billion, the biggest pension hole in the United States.
- Unfortunately, contributions amount to only $4 billion for 2011, the largest single element of its $13 billion budget deficit.
Illinois is the poster child of unfunded pensions in the United States. But state retirement systems could become a national concern, new research shows.
Joshua Rauh, associate professor of finance at the Kellogg School of Management at Northwestern University said that, without reform, some state pensions might run out within the decade:
- By 2030, as many as 31 states may not have the money to pay pensions.
- And, if these funds exhaust their assets, the size of payments for the benefits they have promised will be too large to cover through taxes, putting pressure on the federal government for a bail-out that could potentially cost more than $1 trillion.
- Estimates put the unfunded liabilities at between $1 trillion and $3 trillion after years of states promising benefits but not contributing enough in both good times and bad to cover them.
Many states base their calculations on an 8 percent annual return and use an accounting method called smoothing, which staggers gains and losses over several years, two factors that some observers warn could mask the size of the shortfalls. The problem has come to the fore with the financial crisis and recession. Pension funds, like most money managers, suffered losses. The tax revenues that fund annual contributions to pensions, along with essential services such as health care and education, have plummeted, leaving little room to reimburse the losses, says the Times.
Source: Nicole Bullock and Hal Weitzman, "U.S. state pensions becoming federal issue," Financial Times, May 19, 2010.
Browse more articles on Economic Issues