The Bureau of Economic Analysis on State and Local Government Pension Funding

A couple of years ago, I did an analysis of government finances data from the U.S. Census Bureau over the decades, to measure the extent to which each state’s future had been sold out with regard to (among other things) underfunded public employee pensions.

The worst off state when I did this analysis for FY 2012 was Rhode Island, where FY benefit payments equaled 13.3% of pension assets that year. In FY 2016 that had increased to an even worse 13.6% in Rhode Island, but that state was nonetheless only the second worst off state.  The worst off state in FY 2016 was New Jersey, where pension benefit payments equaled 13.8% of pension fund assets in FY 2016, up from just 11.8% in FY 2012. New Jersey only had enough pension fund assets to pay for 7.2 years of benefits.  The third worst off was Kentucky, with benefit payments equal to 13.5% of pension fund assets, followed by Alaska at 13.4%, Pennsylvania at 12.2%, Illinois at 11.8%, Connecticut at 11.7%, South Carolina at 10.8%, Massachusetts at 10.5%, and Michigan at 10.4%…For the City of New York pension funds, soaring taxpayer contributions and another stock market bubble increased pension fund assets to the point where benefit payments were 9.1% of assets in FY 2016, up from 8.8% in 2015 but down from 11.8% in 2009.  That is still less than half the assets those pension funds required.

At the time I speculated that a more sophisticated analysis, one that took into account that fact that states with rapid population growth might have relatively few retired public employees from a less populated past, but could still be underfunding the pensions that the large number of public employees on the job today were currently earning, might be heading down the same road that has caused pension crises in the states listed above.

The more sophisticated analysis has arrived, from the U.S. Bureau of Economic Analysis.  And it in fact shows massive public employee pension underfunding not only in the states generally associated with bad fiscal practices, but across the board.


The analysis may, as of the time this post is written, by found by following this link.

An article with the findings is here.

I have downloaded a copy of the spreadsheet with all the data, and you can as well.  But a new spreadsheet limited to the public employee pension funding ratios used to make the charts in the rest of this post is here.

State and Local Pension Funding

What the BEA has done is use more reasonable assumptions to get around the self-serving reporting by the public employee pension funds themselves, used to justify some combination of taxpayer underfunding and retroactive benefit increases.  Notably, the expected future rate of return/discount rate.   The same assumptions are used for every state.

The BEA uses a discount rate of 6.0% from the years 2000 to 2003, 5.5% from 2004 to 2009, 5.0% from 2010 to 2012, and 4.0% from 2013 to 2018.  The basis of this is found in Appendix B of this paper.

For private plans and state and local plans, we assume a discount rate series using the AAA corporate bond yields published by the FRB, table H.15, as a reference series.

When the same rules are used to measure the funding level of public pensions as are required of private pensions – to protect workers and shareholders from fraud – one of the assertions made by politicians and public unions – that public employee pensions were fully funded in the year 2000 – is shown to be false.

The BEA reports that the average U.S. state and local government pension fund was only 76.5% funded in the year 2000, the peak of the era stock market bubble. That was a time when politicians and public unions across the country used the soaring stock market as an excuse to reduce pension contributions (and thus taxes), retroactively increase pension benefits to more than public employees had been promised, or (usually) both.  The idea that pension funds were fully funded, or had excess money, however, was a fraud.

In the business world executive pay soared at the same time, justified by the “shareholder value” those executives were supposedly creating. Executive pay didn’t subsequently decline after higher stock prices were exposed to be result of a bubble. Neither, in most cases, were public employee pensions cut back to what was originally promised.  The pay and benefits of new public employees were cut instead.

When that first bubble deflated, according to the BEA, the average funding level of U.S. public employee pensions plunged to a mere 56.2% in 2002, just two years after the bubble peak.  Pension fund assets had plunged by $367 billion in two years, as more money was taken out and less was put in.

According to the future return assumptions that I would use, on the other hand, the average public employee pension fund would have been just as underfunded in the year 2000 as in the year 2002 – because the expected future rate of return would have been even lower in 2000 than in 2002.  After all, from which starting point could future returns be expected to be higher?  The peak of a bubble in 2000?  Or after it deflated in 2002.

For one thing, with stock prices so high in 2000 the dividends paid by companies had fallen to just 1.0% of those prices, on average.  The historic average dividend yield is over 4.0%.  On that basis alone one would have had to assume that future stock returns would be 3.0% lower than the average for the past.  I explained that expecting the historic average rate of return from the peak of a bubble is a double-counting fraud several years ago, in this post:

Let say you are in charge of running a pension fund, and it consists entirely of one paper asset that cost $20 to acquire and entitles the fund to a payment of $1 per year, which can be used to pay benefits.  How much money is in your pension fund?  Twenty dollars.  And what is your expected future rate of return on your investment?  Five percent, because $1 is 5.0% of $20. But let’s say that as a result of a speculative bubble, people start buying and selling pieces of paper identical to yours – and still only paying $1 per year – for $100?  Then how much is in your pension fund?  You probably shouldn’t, but you might say $100.  But then, how much is your expected future rate of return? If you were honest you might say one percent, because $1 is 1.0% of $100.

But if you were the typical public employee pension fund manager of the past 15 years, and the typical actuary such funds were willing to hire, you would probably say the future rate of return was still five percent — even though you were only getting one dollar, not five dollars, in cash return, and even though 5.0% of $100 is $5, not $1. Because, it would be assumed, the trading price the piece of paper would keep going up and up.  Or you might say that the future return would be ten percent, even though you were only getting one dollar and not ten dollars. Because it would go up even faster. That would allow you to hand out retroactive pension increases for politically powerful public employee unions, even though no money had been set aside for the added benefits during most or all of their career, and claim it would cost nothing.  And/or underfund the pension fund, to divert money to other more politically powerful priorities. The nature of the pension lie was double counting:  counting both the inflated asset values and the same, or a higher, rate of return from those inflated values.

Meanwhile, one part of the expected future investment return isn’t “real,” it is just inflation.  And inflation has also been below the long-term average, for years.  That is reason to expect another 3.0% off the future rate of return.  With lower inflation has come lower interest rates, and that explains the mere 4.0% future return assumed by the BEA, based on AAA corporate bond yields published by the FRB, table H.15, as a reference series.

And after the Federal Reserve started buying investment grade bonds like crazy to prop up stock and real estate prices this March, what does that table show for AAA corporate bonds now?

It doesn’t.  But the current yield on the Vanguard Intermediate Term Corporate Bond index fund, which owns bonds as low as BBB, is just 1.4%.  We are in another bubble even worse than the last two. The 2000 bubble was just in stocks, so plunging asset values for stocks were offset by rising asset values for bonds as interest rates fell.  In 2008, however, the plunge in public pension plan assets was $829 billion, not $357 billion, because the bubble was even bigger.   A $1.5 trillion plunge would not surprise me next time.

But even based on a 4.0% future expected return, the average U.S. state and local government public employee pension fund was just 47.3% funded in 2018.  That meant that prior generations of taxpayers and public employees had handed poorer, later-born generations a debt of $4.5 trillion – over and above all the other burdens shifted to them by Generation Greed.  (My estimate for 2017 has been a mere $3.5 trillion).  That is $4.5 trillion that should be in public employee pension funds that isn’t there. The future rate of return on zero is zero.

This doesn’t even include the cost of any additional future retroactive increase in benefits for existing and soon to be retirees.  What state could possibly hand out even more its future residents’ income to those cashing in and moving out?  You know which.  Ours.  New York.

At the time the massive 2000 retroactive pension increased passed for all existing and retired public employees in New York (with the biggest gains going to the retired), the average New York State public employee pension fund was just 81.3% funded according to the BEA.  In 2008, when the massive additional retroactive pension increase for NYC teachers passed (with the biggest gains going to those soon to retire), the average for New York was just 54.3% funded.  And after pension benefits were slashed for new public employees, taxes were increased, services curtailed, and long-term priorities such as the future of New York’s transit system were defunded, all to pay for soaring pension costs, New York’s public employee pension funds were still just 61.8% funded, on average, in 2018.

And if that doesn’t sound as bad as the U.S. average, consider this. There are actually two pension systems in New York State.  The state system includes state workers, and local government workers in the part of the state outside New York City.  As much trouble as it is in, as much as taxpayer pension costs have soared, it is still one of the best-funded public employee pension systems in the country.

The other pension system covers employees of the City of New York and New York City Transit.  Even though over the decades New York City taxpayers have paid more for public employee pensions, as a percent of public employee wages and as a percent of their own incomes, than taxpayers anywhere else, it is still one of the worst funded pension systems in the country.

So that 61.8% funded for New York’s public employee pensions could have meant 80.0% funded, on average, for the New York State pension system, and just 40.0% funded, on average, for the New York City pension system.  And even within the New York City pension system, the richer pension funds for police officers, firefighters, and teachers have far worse funding levels than NYCERS, the underfunded pension plan for everyone else.

For more than four decades the same New York State legislature has set all the rules for all these pension funds.  How New York City ended up so much worse off, despite its taxpayers paying in vastly more, is something no one wants to talk about.  It is under Omerta.

Statewide, in 2018 it would have taken $50 billion in New York State taxpayer funds for public employee pensions to start getting out of the hole, according to the BEA — $18.4 billion for the future benefits current public employees earned that year by working, and $31.9 billion more to catch up after prior generations benefitted from 3 am political deals and headed to Florida with extra loot.   That’s $31.9 billion not for one year, but every year, to get out of a $318 billion hole.

The massive fiscal problems in Democratic-voting so-called “Blue States” has become a political issue, with Republicans and President Trump hoping to use the problem to convince better off people and businesses to leave those states.  Many of these “Blue States” boomed from 2000 to 2019, and the Republicans are hoping to use government policy to engineer an economic decline and a diminished quality of life there.

And in fact the BEA shows the level of public employee pension funding is low in states such as New York, New Jersey, Connecticut, Illinois, California and Oregon.  It started out low, got lower then the 2000s bubble deflated, and has not improved since. Therefore anyone who lives in these states faces a future of rising taxes, collapsing public services, diminished assistance to the needy, and an increasing inability to respond to crises.  Starting from a state and local tax burden, as a share of its residents’ personal income, that is already above average – and far above average in New York City.

This is just part of a bitter and poisoned legacy of the generations that have or will soon retired to low-tax places like Florida, South Carolina, and Arizona, leaving their damage behind.  And their generation of incumbent politicians, for the most part still in charge and expecting to run for re-election, or for Mayor, in the next two years.  And in the case of the state legislature, to generally run unopposed, as special interest money is used for lawyers to keep challengers off the ballot.

It should be noted that I try to use the same colors consistently for different states, and different government functions, in my public finance charts, and the colors are usually based on something.  For states it could be the colors on the state flag, or a prominent pro or college sports team, for example.  For Connecticut, it is based on the fact that Connecticut is one of the light blue set in the board game Monopoly.  It is somewhat ironic that so many of these high-tax “Blue States” in fact end up blue.

And that many of the states that are among those with the lowest state and local tax burdens, as a percent of their residents’ income, turn end up red or orange.  Federal Republicans from these “Red States” are the ones who want people living in the “Blue States” to suffer, because they voted for Democrats who created massive pension underfunding.   But they might want to talk with their state politicians, because according to the BEA the “Red State” pension funds are deep in the hole too, and it is getting worse.

As noted fast population growth disguises the problem in many of these states, for now.  There are many new taxpayers and public employees paying in, and fewer existing retirees collecting.  But when growth slows, the level of past responsibility, or irresponsibility shows up.

In Texas, the cities of Dallas, Fort Worth, and Houston have faced devastating fiscal crisis as a result of past retroactive pension increases, often imposed by the state legislature to benefit retiring police officers and firefighters who now live in the suburbs, and past pension underfunding. Overall, that state’s public employee pension funds were just 50.1% funded in 2018 – after having purportedly been 85.7% funded in 2000.    Florida?  Just 53.6% funded, down from 80.0%.  Worse than New York as a whole, though probably better than New York City (and New Jersey, and Connecticut).

Public employee pensions are being shorted to keep taxes low for rich people in the so-called Red States.  If this keeps up, they will end up where Illinois and New Jersey are today.  (New York has already been there once before, in the 1970s fiscal crisis, and has repeated all the policies — with the exception of actually helping the poor — that led up to that fiscal crisis).

While the interests that took the most in the past may be different in “Red States” than in “Blue States,” the theft from the common future is the same.  That isn’t ideological.  It’s generational. It’s Generation Greed.

How about the “swing states” that are expected to decide the coming Presidential election?  Did the high level of competition for office between the two major parties lead to less fiscal pillage at the expense of future residents and businesses and poorer later born generations?

For the most part, the answer is no.  Wisconsin is generally held up as having the best-run state pension fund in the U.S.  That is probably the case, but even so the average public employee pension fund in that state was just 69.1% funded in 2018 according to the BEA.  Mostly because of pension underfunding and increases at the local government level (as in New York).  In particular, Milwaukee County has faced decades of rising taxes and public service cuts because of a pension increase that benefitted the now long-retired.  As I discussed in this post nearly a decade ago.

Who is The Hell is Scott Walker and Why Did the Cheeseheads Vote For Him?

And all the rest of these “swing states” have even worse public employee pension funding than Wisconsin, with senior-driven Pennsylvania worst off or all.  In that state, according to the BEA, $15.9 billion would have to have been contributed in 2018 to start getting out of the hole — $5.8 billion for pension benefits being earned by active workers today, and $10.1 billion to get out of the hole for the already retired and soon to retire.

Would a federal bailout solve the problem?  The money for it would be borrowed.   In future years who would be made worse off, and it what way, to pay it back? Of course the federal government is already going deep in the hole as it is, to prop up asset prices to benefit older generations, the rich, and the financial sector.  This would just add to the diminished future of higher taxes and/or reduced benefits at the federal level.

To a state and local government politicians, a federal bailout would mean some other politician would be blamed when disadvantaged later-born generations become even worse off to pay for it.  The more separation, in time and between levels of government, can be made between the heist for the beneficiaries and the pain for the victims, the better in their eyes.  But worse off is worse off either way.  And those who benefitted from the heist don’t plan on giving anything back.  If anything, they plan to take even more.

Especially in New York.

6 thoughts on “The Bureau of Economic Analysis on State and Local Government Pension Funding

  1. Tough Love

    Quoting ……………. “That is $4.5 trillion that should be in public employee pension funds that isn’t there. ”

    Actually, BETTER statement would be ……….. “That is $4.5 trillion in pensions that due to their grossly excessive “richness” should never have been promised in the first place.”

    See where I’m going ……… I don’t know if or how those future taxpayers can do so, but they sure have justification to NOT pay for these unnecessary, excessive, and self-serving promises.

    1. larrylittlefield Post author

      In NJ, unlike in NYC, taxpayers didn’t put in enough to pay for much of anything.

      Over the long term, taxpayer contributions averaged 17.0% of payroll for NYC, plus Social Security.

      Compared with 8.4% of payroll for the NY State pension funds, which nonetheless ended up better funded.

      And 6.7% for NJ pension funds. Admitted more than most private employers contribute to 401Ks, but not enough to pay for the pensions NJ public employees were promised to start with, BEFORE retroactive increases and pension spiking.

      The distribution of guilt between taxpayers not paying and public unions cutting deals to take more out varies from place to places. The generational guilt is the same, and not just with regard to pensions.

    2. Tough Love

      Larry, I think that you made the point (I’m now bringing up) for me …………..

      The actual (to-date) NJ Taxpayer contributions (as admittedly small as they have been) are MORE than likley 100% sufficient to fully fund a pension with a value EQUAL to what Private Sector workers in NJ typically get in retirement security from their employers (about 4%-of-pay into a 401K Plan and no more). Public Sector workers (unless they can show demonstrably lower wages after that offset by better benefits such as richer active and retiree healthcare subsidies) never deserved anything greater.

    3. larrylittlefield Post author

      I’m willing to accept the argument that this is what we were promised when we decided to take the job, and that’s what they worked for and what should have been funded.

      Retroactive pension increases? Not so much. That is a social injustice, given the benefits were really rich to begin with.

      I think most people think as I do. Which is why there is so much desperate propaganda to try to pretend those didn’t exist.

    4. Tough Love

      While I have heard and understand the argument ……………. “this is what we were promised when we decided to take the job” ……….. agreeing with it implies that we accept that not only are Public Sector workers entitled to richer pensions, but that they should have greater protections from FUTURE Service reduction than those granted Private Sector DB Plan participants (via ERISA). What justifies that ?

      While I understand that those “protections” are in place in many jurisdictions and vary in strength, I don’t agree with them. Beyond just the rational position that (other than richer pensions/benefits to offset lower wages ….. and then ONLY richer by an amount sufficient to offset any such wage deficiency) ….. it’s the WAY Public Sector pensions & benefits are granted.

      In the Private Sector, the free-marketplace basically set compensation (wages + pension/benefits), and Private Sector employers cannot be forced to compensate at a higher level than is affordable or what management deems reasonable. Even in Private Sector Union shops, the Unions realize that demanding more than the company can afford just kills the host with job losses sure to follow.

      The structure in the Public Sector is the polar opposite, with the Unions acting in collusion with our Elected Officials and the Taxpayers being the ones getting screwed. Clearly there is rampant you-scratch-my-back-and-I’ll-scratch-yours underhanded deal-making going on. The Unions make campaign contributions and provide the election support (and block voting) in exchange for our Elected Officials’ favorable votes on Public Sector pay, pensions, and benefits.

      In any other arena, such overt collusion would be treated as bribe-giving/taking and racketeering.

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