U.S. states have a huge problem on hand. They face a shortfall of at least $1 trillion ($1000 billion) in their funds for employees’ pensions and retirement benefits.
According to a research released Thursday by Pew Center on the States, the states’ financial problems are quickly mounting too.
The gap in the funding for the promised retirement benefits to teachers, firefighters and other public sector employees, threaten the already strained budgets, the research report called the Trillion Dollar Gap pointed out.
States and localities had set aside $2,350 billion to pay for pension, healthcare and other non-pension benefits, such as life assurance, that were estimated to cost $3,350 billion at the end of fiscal year 2008, the report said.
The research group warned that its calculations were likely to underestimate the problem since the study went up to the end of fiscal year 2008, which is June 30 for most states.
For fiscal 2008, state pension plans had $2,800 billion in long-term liabilities with more than $2,300 billion saved.
Illinois is in the worst shape, with only 54 percent of its pension obligations funded, according to the report.
A pension fund is considered healthy if it has a funding level equal to at least 80 percent of its liability. In fiscal 2008, 21 states were below that mark, compared to only 19 states in fiscal 2006.
In fiscal 2000 half of the 50 states had fully funded their pension systems but by fiscal 2008 only four — Florida, New York, Washington and Wisconsin — could boast being able to cover their costs, the center said.
Alaska and Arizona are the sole states that have more than 50 percent of the assets needed to pay for other post-employment benefits, Pew said.
The shortfall is already eating into government budgets at the cost of other services. As the price of these benefits soar, states will have to choose between continuing to pay out and sink deeper into the red or significantly cut back the packages offered to retirees.
The states also have a $452 billion bill coming due for pension payments.
The problem got worse because of the recession and downturn in investment earnings. On average, states expect an 8 percent return every year from their investments but the market index actually fell more than 20 percent over the past decade.