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The Leaflet: The $6 Trillion Albatross Around States’ Necks

December 21, 2017

This week's Leaflet examines public pension problems in all 50 states. A new study finds that unfunded pension liabilities total more than $6 trillion across various state pension systems.

America’s many public pension problems are well known to those involved in public policy, but the issues might be even worse than previously believed. Researchers at the American Legislative Exchange Council (ALEC) report in a new study, titled Unaccountable and Unaffordable 2017, unfunded public pension liabilities (the amount of present liabilities that exceeds current assets) total more than $6 trillion across the 50 states. That amounts to $18,676 for each U.S. resident. This is due to many factors, including low contribution rates, overly generous benefits, automatic cost of living adjustments (COLAs), unrealistic assumed return rates, and states borrowing too much money to cover other expenditures.

The ALEC study examines more than 280 state-administered public pension plans and reports each state’s unfunded pension liabilities using a realistic assumed rate of return of 2.142 percent on investments—instead of the 7.34 unweighted rate averaged from states’ current plans. Three metrics used to judge the health of states’ pension systems are highlighted: total unfunded liability, unfunded liabilities per capita, and the funding ratio—the most important measure.

According to ALEC, with a funding ratio of 61.5 percent, Wisconsin has the best managed pension system. Second in line is South Dakota, at 48.1 percent. The researchers attribute Wisconsin’s relatively high funding ratio to the state’s hybrid pension model, which includes elements of both a traditional defined-benefit plan and a defined-contribution model. Retirement plans in the private sector are usually defined-contribution plans, such as a 401(k) or 403(b), which rely heavily on stock market performance and other financial instruments.

The three least-funded states in the study are Illinois (23.3 percent), Kentucky (20.9 percent), and Connecticut (19.7 percent). Each of these states experienced a dip in their funding ratios compared to 2016. Connecticut’s dead-last ranking is not surprising. It is “one of four states to set retiree benefits through collective bargaining and is unique in that the legislature does not have to consent to contracts for them to go into effect.” The state also uses an assumed rate of return of 8 percent, which paints an extremely unrealistic picture of the pension system’s financial solvency.

Kentucky Gov. Matt Bevin (R) has expressed interest in ending the use of defined-benefit pensions in his state. He would replace them with 401(k)-like plans for new public employees and current ones who choose to transfer their old pensions. Bevin has also proposed lowering the assumed return rate, which is currently 6.75 percent. Low investment returns, COLAs, and state contribution shortfalls primarily led to Kentucky’s pension crisis. The pension problems were partially addressed by the state’s 2013 bi-partisan reforms, which the Bluegrass State is likely to consider reforming again in 2018.

Illinois is the third-least-funded state and has the third-largest unfunded liability debt, which now totals $388.342 billion, according to ALEC’s calculations. A bill has been proposed in Illinois to create a defined-contribution retirement plan for new state employees hired after June 30, 2018, and current employees who wish to move their pensions into the new model. An opinion poll of Illinoisans shows 78 percent of respondents favor letting current state workers enroll in a 401(k)-style plan and 60 percent favor requiring new state workers to enroll in a 401(k)-style plan.

In a Research & Commentary, Heartland Senior Policy Analyst Matthew Glans explains why states must begin to make drastic changes to their public pension liabilities and not wait until it’s far too late to address pension problems. “Kicking the public-pension can down the road would only serve to delay the problem, and increasing taxes and ignoring the core problems created by defined-benefit systems would only ensure the pension system will never become solvent. Comprehensive reforms that allow governments to better manage employee retirement costs are desperately needed, both in Illinois and across the country,” Glans wrote.

 

What We’re Working On

Energy & Environment
Nebraska Approves Last Segment of Keystone XL Pipeline
In this article for Environment & Climate News, H. Sterling Burnett, Heartland’s senior fellow on environmental policy issues, writes about the Nebraska Public Service Commission’s (NPSC) approval of the final segment of the $8 billion Keystone XL Pipeline. With NPSC’s 3–2 decision, the Keystone XL Pipeline cleared its final regulatory hurdle after an arduous nine-year struggle. Despite the fact the permits have been granted, questions remain about whether the final segment of Keystone XL will be completed. For much of the time the pipeline was under consideration, oil prices exceeded $100 per barrel. With oil now hovering around $50 per barrel, it is unclear whether the pipeline still makes economic sense.

Education
Chronic Public School Teacher Absenteeism Underscores Need for School Choice Options
In this Research & Commentary, Policy Analyst Tim Benson writes about a new Fordham Institute report that found one out of every four teachers (28.3 percent) at traditional public schools across the United States are “chronically absent,” meaning they are out of the classroom for sick or personal leave at least 10 days in a typical 180-day school year. In Florida, more than 40 percent of traditional public school teachers are chronically absent. Even wore, more than 50 percent of Nevada traditional public school teachers and a staggering 79 percent of Hawaii traditional public school teachers are chronically absent.

Health Care
Research & Commentary: Arizona Seeks Medicaid Waiver to Install Work Requirements
In this Research & Commentary, Senior Policy Analyst Matthew Glans examines Arizona’s effort to use Medicaid waivers to add work requirements and time limits to its Medicaid program. “Implementing Medicaid work requirements would be a good first step for Medicaid-expansion and non-expansion states toward helping to limit the rising costs of Medicaid,” Glans wrote.

Budget & Tax
Research & Commentary: Iowa Needs Pension Reform
In this Research & Commentary, Senior Policy Analyst Matthew Glans examines the need for comprehensive pension reform in Iowa. “Hybrid [pension] models do not eliminate all the problems of defined-benefit plans, but they do limit the rapid growth of liabilities in the future. Iowa policymakers should consider using hybrid plans as a viable model for reforming state workers’ pensions,” wrote Glans.

From Our Free-Market Friends
Free Speech on Alabama Campuses
In “Free Speech on Campus in Alabama,” the Alabama Policy Institute (API) explores problems and solutions related to free speech on college campuses located in the state. Fourteen colleges and universities in Alabama were either given a “red light” or “yellow light” rating from the Foundation for Individual Rights in Education (FIRE) for having policies that prohibit speech. None were given a green light. The difference between “red light” and “yellow light” schools is that red light colleges apply more severe and broader restrictions on speech. API recommends university administrations explicitly state their support for freedom of speech on campuses, and it calls for state legislators to pass legislation safeguarding First Amendment rights for all college students.  

Author
Arianna Wilkerson works in government relations at The Heartland Institute.
awilkerson@heartland.org