States Face a $1 Trillion Shortfall for Retirees

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For many state governments, the chickens are coming home to roost.

There was a $1 trillion shortfall at the end of fiscal year 2008 between the $2.35 trillion states had set aside to pay for employees' retirement benefits and the $3.35 trillion cost of these obligation, according to a report released Thursday by the Pew Center on the States. The shortfall, which will have to be paid over the next 30 years, equals more than $8,800 for every U.S. household.According to Pew, these figures probably underestimate the problem because the most recent data do not account for the second half of 2008, when the financial crisis caused the investments by state pension funds to nosedive. Those loses will be spread out over several years under the accounting methods used by many states.

"While the economic crisis and drop in investments helped create it, the trillion dollar gap is primarily the result of states' inability to save for the future and manage the costs of their public sector retirement benefits," said Susan Urahn, managing director, Pew Center on the States, in a press release.

Only Florida, New York, Washington and Wisconsin had fully funded pension systems in 2008. Eight years earlier, just over half did. In Connecticut, Illinois, Kansas, Kentucky, Massachusetts, Oklahoma, Rhode Island and West Virginia more than one-third of the total pension liability was unfunded. Illinois and Kansas had less than 60% of the necessary assets on hand, according to Pew.

The situation seems to be spiraling out of control as tax receipts dwindle as the economic recovery continues to slog along.
In a separate press release, the Center on Budget and Policy Priorities says, "states face continued major budget problems, because of the steepest-ever decline in state revenues and the end of most federal Recovery Act assistance halfway through their coming fiscal year." Governors are now proposing draconian budgets that could cost the economy 900,000 jobs at a time when they are needed most.

Two Leading Examples

Earlier this year, Gov. Arnold Schwarzenegger proposed large pay cuts for state workers and the elimination of several social service programs to help close California's $20 billion budget gap. He is also furloughing state workers and hitting up the federal government for $6.9 billion. California's pension liabilities grew 125% between 1999 and 2008, outpacing assets, which grew 65% in that period.

New Jersey also is a mess. Governor Chris Christie, a Republican who defeated his predecessor Democrat Jon Corzine by vowing to cut spending, has done just that as he tries to close the state's $2 billion budget deficit. Democrats are incensed by Christie's plan, which includes $475 million in cuts to school aid. New Jersey residents already pay the highest property taxes in the country, making raising taxes further politically unfeasible. Further adding to New Jersey's fiscal misery is its pension system. As Pew notes, "New Jersey had a $7.5 billion pension surplus in 2000, but years of failing to meet the actuarially required contribution led to an unfunded liability of $34 billion in 2008."

Without a massive federal bailout, the state's financial woes will only get worse.
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