2 Simple Charts Show Which State Pensions Are Most Likely To Enforce Benefit Cuts

Tyler Durden's picture

A new research note from Moody's found that State pension funds were underfunded by $1.3 trillion at the end of FY15 but was expected to grow to $1.8 trillion at the end of FY17 as pensions continue to struggle with low returns.  We've discussed the unintended consequences of the Central Bank's low-rate polices on pension funds multiples times (see "Pension Duration Dilemma - Why Pension Funds Are Driving The Biggest Bond Bubble In History")...with the two most likely outcomes being benefits cuts for pensioners and/or crippling tax hikes for citizens.

Total US state aggregate adjusted net pension liabilities (ANPL) totaled $1.25 trillion, or 119% of revenue in fiscal 2015, Moody's Investors Service says in a new report. The results, based on compliance with new GASB 68 accounting rules, set a new ANPL baseline and are poised to rise for the next two fiscal years as market returns fall below annual targets.


"The median return for public pension plans in FY 2016 was 0.52% compared to an average assumed investment return of 7.5%," Moody's Vice President -- Senior Credit Officer Marcia Van Wagner says. "We project that aggregate state ANPL will grow to $1.75 trillion in FY 2017 audits."


The states with the highest pension burdens -- measured as the largest three-year average ANPL as a percent of state governmental revenue -- were consistent with previous years. Illinois topped the list with pension liabilities at 280% of total governmental revenue, followed by Connecticut (Aa3 negative) at 209%, Alaska (Aa2 negative) at 179%, Kentucky at 162%, and New Jersey at 157%.

Given that pretty much every state pension is now underfunded, Moody's introduced a new metric which they referred to as the "Tread Water" benchmark.  The largest underfunded plans in Kentucky, Illinois and New Jersey would require an incremental 7 - 7.5% of annual state revenue for contributions in order to simply stop unfunded liabilities from growing further.

Moody's new report also introduces a new "Tread Water" benchmark, which measures whether states' annual contributions to their pensions are enough to keep the unfunded net liability from growing. For FY 2015, states were evenly divided between falling short and exceeding the benchmark.


The report "States -- US: Medians - Low Returns, Weak Contributions Drive Continued Growth of State Pension Liabilities," says there were several states whose pension contributions were notably below the Tread Water mark, including Kentucky (Aa2 stable), New Jersey (A2 negative), Illinois (Baa2 negative), and Texas (Aaa stable).


To tread water, Kentucky would have had to contribute an additional 7.5% of revenue to its pension plans; the figure for Illinois is 6.8% of revenue and 6.9% for New Jersey. A tread water contribution plus debt service and retiree health care costs would result in total fixed costs of 33.5% for fiscally stressed Illinois and almost 31% of revenues for Connecticut.

Meanwhile, the CATO Institute points out that wages and benefits for state employees totaled $1.4 trillion in 2015 or 53% of total state and local spending.  Moreover, the report highlights that retirement benefits for state and local workers are substantially higher than the private sector at roughly $4.80 per hour compared to $1.23 per hour for private-sector workers. 

The largest component of state and local government spending is compensation for 16 million employees.  Total wages and benefits for state and local workers was $1.4 trillion in 2015, which accounted for 53 percent of all state and local spending.


State and local workers typically receive more generous benefit packages than do private-sector workers.  On average, retirement benefits for state and local workers cost $4.80 per hour, compared to $1.23 per hour for  private-sector workers. Insurance benefits (mainly  health  insurance)  for state  and  local  workers cost $5.43 per hour, compared to $2.59 per hour for the private sector.  Most state and local workers receive retirement health benefits, whereas most private-sector workers do not.


The costs of government pension and retirement health benefits are expected to rise rapidly in coming years.  Governments have promised their  workers generous retirement benefits, but most states have not put enough money aside to pay for them.  As a consequence, state and local governments will either have to cut benefits in coming years or impose higher taxes. 

Per the following chart, many states have racked up over $20,000 of liabilities per capita, a level from which it will be very difficult to recover absent benefit cuts, massive tax hikes and/or a federal bailout.

Debt, Pension, OPEB


Looking at pensions on a standalone basis, New Jersey, Illinois and Alaska remain the most at risk with underfunded liabilities equal to over $10,000 per person living in those states.  Meanwhile, only Wisconsin and South Dakota have fully funded plans.



But, as the CATO Institute points out, the pension crisis is likely much worse than what most auditor reports would suggest because discount rates of 7.4% are unreasonably high.  CATO estimates that reducing the discount rate from 7.4% to 2.7% would increase state pension underfunded liabilities from $1.2 trillion to $3.4 trillion. 

Pension shortfalls are actually larger than these figures indicate.  Those are the officially reported figures, but financial experts think that the discount rates used to report pension liabilities are too high.  Higher discount rates reduce reported liabilities and create an overly optimistic picture of pension plan health.


In his study, Rauh recalculated pension plan funding using a 2.7 percent discount rate, rather than the official average rate of 7.4 percent.  His    recalculated  unfunded  liability jumps from $1.2 trillion to $3.4 trillion.  Similarly, Munnell and Aubry found that their unfunded pension liabilities  jumped to $4.1 trillion if plans are estimated using a 4 percent discount rate.  Under that assumption, the funding level of state and local pension plans averages just 45 percent.

Unfortunately, the pension ponzi becomes more and more unsustainable each year with funds simply borrowing from future benefit payments, which are almost certainly impaired in many states, while paying current benefit recipients in full.  While these types of "kick the can down the road" games can be played for a long time, eventually the massive underfundings will have to be addressed...and that will not be a pretty day.

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Stan Smith's picture

We'll see who's "Everything is Awesome" crowd becomes self-aware first. My money is on Illinois, but who knows.

Joe Davola's picture

Probably illegal in many jurisdictions to cut state worker pensions.

I still can't believe there wasn't a big problem after 2008.  With so many looking for yield to make their underfunded pensions look better, how come a bunch of states/municipalities weren't left holding the bag on some belly up CDO's.  Still feel that Meredith Whitney had it figured out, but when it didn't come to pass she was kicked to the curb.

Boris Alatovkrap's picture

Boris is still work hard, busy, to extract pension from low depth urban copper ore.

HRH of Aquitaine's picture
HRH of Aquitaine (not verified) Boris Alatovkrap Oct 10, 2016 2:00 PM

Start checking in their garages. Craigslist Hunter makes a good living mining suburban garages!

38BWD22's picture



When we reach the End Game, I will be curious to see whether raising taxes or cutting benefits will be the Enchilada here.  Residents of states w/out Income Tax may be at an advantage ESPECIALLY if they have little or no income...  No income = No Income taxes!  That's if the FLs and NHs decide to impose Income Taxes.

Quietly held assets (or even informal copper mining as Boris suggests) may be an excellent defense vs. .gov predation...  They may try other things (other taxes), but the funding gap is enormous.  They will cut pensions.


Moral of this little story:

If you .gov workers are counting on pensions from your states, you need to think harder.  Your pensions are likely in great jeapordy.

Zarbo's picture

Is reason power go off again?

Bear's picture

FED bought MBS and TARP was temporary bailout by you and I

AGuy's picture

"Probably illegal in many jurisdictions to cut state worker pensions."

laws Change all the time to make illegal actions perfertly legal. This is common when it comes to laws that the gov't has to abide. Laws for the people, not so much!


The Last Mofo Standing's picture

All you need to do to make illegal legal is drop the first two letters! ... il-legal ... fixed it!

The Last Mofo Standing

AGuy's picture

All you need to do to make illegal legal is drop the first two letters! ... il-legal ... fixed it!

In the case of Illinois, adding a space will work. Perhaps thats why so much shenanigans happens in IL, in IL, "IL legal" is legal.

Omen IV's picture

those states with constitutional guarantees are already in the que for referendums

the unions will scream but will not get traction - the property taxes in NJ / NY (outside of nyc) are already nose bleed levels and affect the purchase prices - when interest rates go up in many cases the property taxes will kill deals

Wages of teachers / cops /  admin /  at all levels will be challenged and the pensions will look like the Teamsters six months ago - 50% cut

JimJinNJ's picture

...and New Jersey just passed a 23 cent per gallon increase in gas taxes--and it is not earmarked for pensions.  I gotta get out of this state before it hits.

DeathMerchant's picture

California is probably in the running as well unless they start taxing gang tattoos

rlouis's picture

I'm with you on that - the Illinois pension fund has probably been robbed blind, but we won't know until it goes caput and gets audited.  But I also think Cali's pension investments are totally dependent on the Fed driven bond, stock and real estate bubbles.  Ready to blow up any time. 

hound dog vigilante's picture


"robbed blind"


this is probably true in many other states, too.


i doubt the auditors look very hard for the actual fund assets, which are mostly IOU's.  The problem is 10x worse than these reports let on...

innocent observer's picture
innocent observer (not verified) Stan Smith Oct 10, 2016 1:00 PM

not. the unions have illinois by the short hairs.

google "illinois constitution article XIII"


IL state employees have it made.

jcaz's picture

Everybody thinks they have it made-

Until they don't....

Don't look for some paper to save your pension- laws change every day, and certainly will when the economics finally fail.

And certainly not some union-  In the end,  unions always fail when the serious money goes away-  they've been a short-term solution to some problems in history, but in the end, they're just another expense.   Ask Atlantic City about unions today.

What people who participate in these "traditional" pension systems refuse to acknowlege is that they are simply involved in Ponzi schemes- there is no mystery to them.  The ONLY reason they've existed as long as they have is because we've always been able to pull forward future growth, and as long as GDP and population grows fast enough, the Ponzi continues;

But we're now in about Year 30 of slowing economic growth, and all the trick Fed financial engineering won't hide the basic problem anymore- not enough people are contributing to the pie to cover free slices for everyone.

The only solution is what most companies figured out long ago- discontinue the tradional pension,  force employees to provide for their own retirements, and focus on producing output, rather than coddling people who no longer provide any input.


Cloud9.5's picture

If you are in DROP grab the money and run.

Stan Smith's picture

I'm amused by folks who do this for a living who pedal out a 7.5% return when the return comes to .52%.

It's not a matter of legal/illegal (although maybe it should be) but other than being paid to lie to your constituents (ding ding ding ding) how is allowed and viable? Rhetorical I know, but just saying.

buzzsaw99's picture

what everyone is discounting is the stock market doing anything but going up over the longer term.

Belrev's picture

NBC poll just out. Clinton 46% Trump 35%, Sample 47% Democrats, 38% Republicans.

GreatUncle's picture

Not interested in construed polls a waste of time you can ascertain nothing from a manipulation.

Bit like the current markets really.

AGuy's picture

"NBC poll just out. Clinton 46% Trump 35%, Sample 47% Democrats, 38% Republicans."

Consider that there are significantly more DNC voters than RNC votes. There is significant portion of the public that will vote for Hillary no matter what, especially women voters that only care that they are voting for a female president.

Obozo and crew have been flooding battleground states with illegals that will vote DNC. Plus Homeland security is going be contining the votes in selected battleground states. Don't be surprised if the Hilda beast wins in November.

Even if Trump wins, its not going to make much of a difference:

$20 Trillion in Fed debt about another $4.5 Trillion in Muni/state debt.

about a dozen states bordering in bankruptcy

about 20 Million Boomers will retire, stop paying taxs and start collecting SS/pensions over the next 4 years.

$6 Trillion in corporate debt and about half of that was used to fund stock buybacks.


Even the worlds best mechanic cannot fix a car that been through the car crusher.

BandGap's picture

I should have taken that college teaching job in Wisconsin back in the day.

Countrybunkererd's picture

I bailed on a .gov job because i couldn't deal with working only 2 of the 5 days in a week.  My boss told me on my second week that i needed to pace myself and spread the work out over the week.  And we wonder why taxes are so high and we are broke at all levels of the .gov.


NotBuyingIt's picture

I contracted for several .gov agencies back in the day. Best pay, yet the WORST jobs I ever had in my entire life! You gotta be some kind of a zombie to even tolerate that environment. I knew we, as a country, were in trouble after these experiences. The only and inevitable end is total collapse.

hardmedicine's picture

YES Countrybunrkererd.  I worked at the EPA back in the late 80's early 90's and I couldn't handle the boredom.  I felt I was getting a paycheck for not doing anything useful and Ibailed.   Even if I had known, I wouldn't have stuck it out.  I feel that i lived my life and gave of myself and was productive to the best of my abilities.


Biblical in the way that Jesus taught. 

Antifaschistische's picture

"we wonder why taxes are so high"

I haven't wondered...and I also won't wonder when they double.

rockstone's picture

One summer during college I worked for a county in the deep south. Played booray for hours on end.

General Titus's picture

The liberal DemocRats & their Liberal Cuckservative Komrades used the public pension system as a piggie trough for themselves, family, friends, and campign donors.

Seasmoke's picture

Great. I can't wait for it to happen. Don't give a single one of those public takers one penny more than whatever the limit on Social Security is. And also put them all on Obamacare where they belong.

hardmedicine's picture

They already are doing JUST THAT.  I found out that in Texas if you are going to get a pension they will deduct the amount of your social security check away from your pension and that the only way to get around this is if you had worked more than 25 YEARS in the private sector.  The politicians are WAY AHEAD OF YOU.


The sheeple just haven't found it out yet. 


It's surely and definitely coming. 

Madcow's picture

Precious metals are practically screaming “deflationary collapse” – as all that “money” created by the central planners simply does not exist, never did exist, never will exist in the real world. They can try and levitate the energy markets – but those too are headed to zero.


The NWO global planners and central bankers are VERY close to achieving their 50-year goal:  A worldwide deflationary collapse followed by a glorious new century characterized by widespread poverty, cannibalism and Sharia law.


It’s the only way the bankers can seize all assets across the globe.


People will be upset when they realize that their “retirement funds,” pensions, insurance policies, etc. were nothing but a fraud and a scam.  But by the time they figure it out, predator drones will be zapping protesters from the sky and the private prison industry will be there to welcome anyone who complains with open arms.

GreatUncle's picture

All FIAT goes to 0 in the end even gold ETF's now sold at 250x the amount of registered gold. People equate a gold ETF with the real value but in reality if there is ever a market call then it is worth 1/250th of the price. Even more realistic you get nothing, elite entitlement comes first.

rockstone's picture

Wow. And my family thinks I'm "doom and gloom". Thanks. Can I show this to them?

bornlastnight's picture

OK, I admit I'm not cool and hip...but what does "OPEB" stand for?

Kefeer's picture

"Other Post Employment Benefits", such as healthcare, assistant living insurance or life insurance and perhaps college remission.  These can be as substantial a promise as the pension itself, which is why they are the first to hit the chopping block. 


The best way to default on you liability is to have a good M&A (Merger and Acquisition).  We will see more and more of these as we move forward.  Perhaps we see the merger of two states that become one new state.  You never know.

Delphi_Addiction's picture

Perhaps Kalifornia will merge with the Pacific Ocean, NY/NJ with the Atlantic and IL with Lake Michigan.

That's (climate) change I can believe in. 

Antifaschistische's picture

And New York will try to merge with South Dakota, Wisconsin and Oklahoma.   But, they don't have to try, because that's exactly what our Federal Government has done.  It will punish more prudent states, to subsidize the most parasitic states....because that's what .gov does.

Senseless Urinal Cake's picture

Let Cook and Lake County go their own way, take East St. Louis with them, and ILL. would quickly become solvent. 

VWAndy's picture

   Ask the people expecting those fat pensions how they think it can happen if you want to watch some mental gymnastics.

  First answer raise taxes by 20k per cap. When that gets laughed at.

 Print it I dont care. When that gets laughed at. Somehow its my problem. Kinda fitting they call them boomers. Cuz thier heads will explode when they find out. You will get nothing and like it.



AGuy's picture

"First answer raise taxes by 20k per cap. When that gets laughed at."

They certainly will raise taxes in an attempt to kick the can as far as possible. Only when they run out of cash and raising taxes further decreases tax revenue will the default.

That said it appears the IL is probably close to that point since it already has more than $8 billion in unpaid bills. Business are already leaving and going bust. Perhaps raising taxes can delay an IL default by a year or so.


VWAndy's picture

 It looks like they passed that taxing limit back in 08. Exponenents are a bitch.

GreatUncle's picture

Already figured it out, prefer to now exist as a "do not pay into the system". Why throw good money after bad?

If more people adopt this approach those pension ponzis are going to become even harder to support.

VWAndy's picture

 Russia found out the hard way about the black markets. More production went out the back door than the front. Then there was the security people taking all they could. Thats one big weakness in a security complex full of lying thieving backstabbers. They eat all the seed corn eventually every time. Its a human nature thing.

WakeUpPeeeeeople's picture

What does OPEB stand for in the first chart?

How about municipalities going broke? Is this accounted for, especially if the state steps in?

Kefeer's picture

"Other Post Employment Benefits", such as healthcare, assistant living insurance or life insurance and perhaps college remission.

SubjectivObject's picture

Joogle search: Other Post Employment Benefits