The State Pension Crisis

From: Wall Street Journal

The Hidden State Financial Crisis 

By MEREDITH WHITNEY

Next month will be pivotal for most states, as it marks the fiscal year end and is when balanced budgets are due. The states have racked up over $1.8 trillion in taxpayer-supported obligations in large part by underfunding their pension and other post-employment benefits. Yet over the past three years, there still has been a cumulative excess of $400 billion in state budget shortfalls. States have already been forced to raise taxes and cut programs to bridge those gaps.

Next month will also mark the end of the American Recovery and Reinvestment Act's $480 billion in federal stimulus, which has subsidized states through the economic downturn. States have grown more dependent on federal subsidies, relying on them for almost 30% of their budgets.

The condition of state finances threatens the economic recovery. States employ over 19 million Americans, or 15% of the U.S. work force, and state spending accounts for 12% of U.S. gross domestic product. The process of reining in state finances will be painful for us all.

States Face 1.26 Trillion Retirement Benefit Shortfall

From: YID With LID

The Unions can bitch and protest all they want but it will not change the facts, state budgets are facing an increasingly large gap between what they owe in retirement benefits and what they can pay and unless something is done about it today these states will be heading toward bankruptcy and no one will get paid.

Pew Research released a study that should strike fear in the hearts of most state governments. The study reports that the pension and health-care funding gap now stands at $1.26 trillion dollars, which is up 26 percent over the previous year. Whats worse is that $1.26 trillion may be an understatement:

The $1.26 trillion figure is based on states’ own actuarial assumptions. Most states use an 8 percent discount rate—the investment target that states expect to earn, on average, in future years. But there is significant debate among policy makers and experts about what discount rate is most appropriate for states to use when valuing pension liabilities. This is an important issue because, depending on how those liabilities are calculated, states’ total funding shortfall for their long-term pension obligations to public sector retirees could be as much as $1.8 trillion (using assumptions similar to corporate pensions) or $2.4 trillion (using a discount rate based on a 30-year Treasury bond).