Pension Funding: State Rankings

April 5, 2016 |

In Brief: 

One indicator of a fiscally sustainable government is that it sufficiently funds its legally-binding pension obligations to retired public employees. This data visualization explores the relative performance of the 50 states according to their unfunded pension liability, which is the amount of the pension obligation the government has not funded, on a per-resident basis.

Introduction: Why We Measure

Citizens should be able to understand what their governments are undertaking and assess how well they are doing it. Unfortunately, it can be challenging to find the information—and the time—to make such an assessment. This is particularly true when it comes to public finances. To meet the challenge, US Common Sense has collected public financial reports in one place, extracted “top line” financial numbers, and ranked local and state governments’ relative performance on GovRank.org.

We have extracted data on government's’ revenues and expenses, their financial flexibility, and their unfunded liabilities. To help citizens understand how sustainable their governments are, we created three summary indicators, and one overall fiscal sustainability grade per government where sufficient data was available. In this series of briefs, we explain each indicator, how well or poorly governments performed, and provide rankings and interpretation.

Overview: Fiscal Sustainability and Unfunded Pension Liability

A government is fiscally sustainable if it can meet the service needs of its current population without jeopardizing its ability to meet the service needs of its future population. GovRank.org measures fiscal sustainability using three ratios: Budget Balance, Asset Flexibility, and the, Unfunded Pension Liability per capita, which we explore in this brief.

By law, governments are generally required to pay retired public employees any contractually-promised monthly pension payments throughout their retirement. During the employee’s active working years, the employee and employer pre-fund the benefit by setting aside a portion of the employee’s salary to a fund which is then invested and earns investment returns. The fund is expected to grow on a schedule that will provide promised benefits for generations of employees, but that expectation relies on successfully investing a full fund and meeting or exceeding expected investment returns each year. The total amount a government owes current employees and active retirees during retirement is called the actuarially accrued liability, or the pension liability. The shortfall between the pension liability (what the government owes) and the assets in the pension fund (what it has) is called the unfunded actuarially accrued liability, or the unfunded liability. The unfunded pension liability per capita reflects this pension funding shortfall per resident. The other ratios are discussed in related briefs.

The unfunded pension liability per capita is the pension funding shortfall per resident.

Pension Funding = Unfunded pension liability / Population

  • Pension liability is the total amount a government has promised to pay retired public employees in monthly pension payments throughout their retirement.
  • Unfunded pension liability is the shortfall between the total pension liability amount the government owes and the value of the assets in the pension fund (what it has).

What the ratio tells us: The per-capita unfunded pension liability sheds light on a government’s fiscal sustainability by conveying the projected amount of money it owes retired and current employees in pension benefits that it has not set aside in an interest-bearing financial account, while controlling for population of the government’s jurisdiction.

Interpretation: The higher the unfunded pension liability per capita, the larger the financial burden a government faces, and the less fiscally sustainable it is.

Pension Funding Ranking: To rank pension funding performance, we used the reported unfunded pension liability for 2014 (which was the most recent available at the time of document collection), or the most recent previous year available. We summed the unfunded liability for up to five pension funds to which the government contributes. To control for population, we then divided the unfunded liability by the 2014 Population as estimated by the US Census Bureau. We then normalized the ratio from 0-1 and calculated the percentile rank for each government. We only compared same-type governments: cities to other cities, counties to counties, and states to states.

About the Data

We collected information on unfunded pension liabilities for each of the 50 U.S. states. The data are from states’ Comprehensive Annual Financial Reports (CAFRs), audited financial documents available to the public. Pension liabilities are reported in the “Required Supplementary Section” of CAFRs. This section is not audited and governments are allowed to select an expected growth rate for their pension assets. There are no missing data for the states.

It is relatively common for governments to report the value of their pension fund—both its funded and unfunded portions—every second or third year rather than annually. We use the 2014 pension fund valuations when it is available, otherwise we employ the most recent valuation back to 2011. The valuation year for the governments in this brief are as follows:

Under GASB 68, the method of calculating the pension liability is changing. Prior to 2015, most governments reported the unfunded accrued actuarial liability (UAAL). The new standard is to report the net pension liability (NPL). Because governments are transitioning to the new standard, we report whichever estimate the government reports. We do not distinguish between the two in this analysis.

To calculate the Pension Funding percentile, we first calculate the per capita unfunded pension liability. We report the sum of UAALs for up to five pension funds within a single government. Population data are from the U.S. Census Bureau’s 2014 vintage estimates. Because they reflect the size of outstanding obligations, these percentile ranks are inverse to the unfunded liability per capita. In other words, the lower the unfunded liability per capita, the higher the percentile rank and the better the performance.

One additional data limitation is worth highlighting: in addition to pensions, governments often owe other retirement benefits to their retired employees. These benefits include health care benefits and others, which are collectively known as Other Post-Employment Benefits (OPEB). OPEB liabilities are even less systematically reported than pension liabilities, so we provide data on GovRank.org when available, but do not include them in this analysis. However, it bears emphasizing that unfunded OPEB liabilities could substantially alter the magnitude of obligations described below.

Pension Funding Results

Unfunded Pension Liability per Capita: States<br> 2014 or Most Recent Prior Valuation
  • The states’ mean unfunded pension liability per capita is $3,969. In Wyoming, unfunded employee pension liabilities were $0 per resident, meaning their pension plan was fully funded. The worst performance was in Alaska, where the unfunded liability was $26,336 per capita.
  • Forty-nine of the 50 states have an unfunded pension liability. Several states have relatively low unfunded liabilities, including Idaho ($3 per capita), Nevada ($8 per capita), Oklahoma ($23 per capita), Ohio ($26 per capita), and Arkansas ($48 per capita). Five of the ten states with the best pension funding rank—meaning they have the lowest per-capita unfunded liabilities—are located in the Upper Midwest and the Great Plains: Wyoming, South Dakota, Oklahoma, Iowa, and Minnesota.
  • Twenty-three states have pension liabilities over $2,500 per capita, and 11 of these have liabilities of more than $5,000 per capita. Although there is no academic consensus concerning the specific level at which pension liability becomes unsustainable, governments with high unfunded pension liabilities are at greater financial risk in the long term, in part because public employee pensions are legally protected obligations, which governments are required to fund adequately over time to meet their obligations. Failing to make annual pension fund contributions can generate exponential growth in the unfunded portion of the liability.
  • Among the bottom 10 states, the mean unfunded pension liability per capita is $12,671. Illinois and Connecticut both performed poorly in the overall fiscal sustainability rank, while South Dakota and Alaska performed relatively well.

Table 1. Pension Funding Performance of US States

State

Pension Funding Percentile Rank

Unfunded Pension Liability per Capita

Total Unfunded    Pension Liability

Overall Fiscal Sustainability Percentile Rank

Population

(2014)

OREGON

98

-$571

-$2,266,700,000

75

3,970,239

WYOMING

96

$0

-$221,468

98

584,153

SOUTH DAKOTA

94

$0

$8,452,839,936

95

853,175

IDAHO

92

$3

$4,286,000

93

1,634,464

WISCONSIN

90

$6

$31,700,000

55

5,757,564

NEVADA

88

$8

$23,629,000

55

2,839,099

OKLAHOMA

86

$23

$89,626,000

90

3,878,051

OHIO

84

$26

$298,495,000

63

11,594,163

ARKANSAS

82

$48

$141,713,000

65

2,966,369

IOWA

80

$109

$339,712,000

85

3,107,126

MINNESOTA

78

$161

$878,517,000

58

5,457,173

VIRGINIA

76

$175

$1,453,853,000

60

8,326,289

INDIANA

74

$201

$1,324,509,000

73

6,596,855

ARIZONA

72

$217

$1,458,044,000

55

6,731,484

NORTH CAROLINA

70

$363

$3,614,309,000

60

9,943,964

TENNESSEE

68

$407

$2,664,115,954

83

6,549,352

ALABAMA

66

$610

$2,958,446,000

38

4,849,377

WASHINGTON

64

$652

$4,603,000,000

43

7,061,530

MICHIGAN

62

$706

$7,001,000,000

33

9,909,877

DELAWARE

60

$802

$749,941,000

45

935,614

MISSOURI

58

$833

$5,049,858,000

38

6,063,589

NEW YORK

56

$1,005

$19,846,000,000

20

19,746,227

NEBRASKA

54

$1,005

$1,891,134,000

80

1,881,503

CALIFORNIA

52

$1,115

$43,265,033,460

18

38,802,500

FLORIDA

50

$1,128

$22,445,338,000

50

19,893,297

PENNSYLVANIA

48

$1,421

$18,165,721,764

25

12,787,209

TEXAS

46

$1,444

$38,932,009,000

68

26,956,958

LOUISIANA

44

$1,626

$7,560,135,000

28

4,649,676

GEORGIA

42

$1,635

$16,505,999,000

35

10,097,343

MAINE

40

$1,728

$2,298,518,000

43

1,330,089

UTAH

38

$1,958

$5,762,172,000

78

2,942,902

NORTH DAKOTA

36

$2,247

$1,661,907,838

88

739,482

WEST VIRGINIA

34

$2,329

$4,308,517,000

48

1,850,326

VERMONT

32

$2,556

$1,601,191,000

28

626,562

MARYLAND

30

$3,137

$18,750,038,000

15

5,976,407

NEW HAMPSHIRE

28

$3,274

$4,344,620,431

28

1,326,813

KANSAS

26

$3,363

$9,765,906,000

43

2,904,021

MONTANA

24

$3,510

$3,592,806,000

70

1,023,579

SOUTH CAROLINA

22

$3,595

$17,371,023,000

53

4,832,482

MASSACHUSETTS

20

$3,988

$26,899,966,000

10

6,745,408

RHODE ISLAND

18

$4,132

$4,359,927,000

23

1,055,173

NEW JERSEY

16

$4,171

$37,282,413,195

5

8,938,175

NEW MEXICO

14

$4,346

$9,062,901,000

30

2,085,572

COLORADO

12

$4,593

$24,599,106,000

40

5,355,866

MISSISSIPPI

10

$4,938

$14,783,628,000

28

2,994,079

KENTUCKY

8

$5,443

$24,021,480,194

8

4,413,457

HAWAII

6

$6,043

$8,578,300,000

13

1,419,561

CONNECTICUT

4

$7,195

$25,877,300,000

3

3,596,677

ILLINOIS

2

$8,618

$111,000,000,000

1

12,880,580

ALASKA

1

$10,483

$7,722,896,641

68

736,732