A new report says public pension systems in Alabama, Mississippi and South Carolina are struggling financially and need reforms to avoid taxpayer bailouts or riskier investments.
The Equable Institute, which authored the report, is a bipartisan nonprofit that helps policymakers solve funding challenges with public pensions.
The authors, Executive Director Anthony Randazzo and research Vice President Jonathan Moody, say most state and municipal pension plans are distressed or fragile based on their analysis of their funding ratios, which is defined as the share of future obligations covered by current assets.
Regionally, South Carolina is in the worst position with a funding ratio of only 58.3%. Its unfunded liabilities would gobble up 9.21% of the Palmetto State’s gross domestic product.
According to the report, officials in the Palmetto State have increased their taxpayer contributions for the South Carolina Retirement System starting in 2018 with a 200-basis point increase from the previous 11.56% rate and 100 basis points after that.
Mississippi’s funding ratio is at 59.9% and its unfunded liabilities would eat up 14.88% of the state’s GDP.
Alabama’s funding ratio hovers at 61.7% and its unfunded liability represents 8.88% of the state’s GDP.
Most of the Southeastern states have well-funded pension systems, led by Tennessee (97.4% funding ratio), followed by North Carolina (84.1%), Florida (82.2%), Georgia (72.3%) and Louisiana (71.5%).
The authors singled out Mississippi over what they consider to be an excessive predicted rate of return. Mississippi is the only state nationally with a 7.55% investment forecast, but the Public Employee’s Retirement System of Mississippi’s governing board is planning to eventually lower that to 7%.
The study’s authors also say that many pension funds have predicted rates of return for their investment that are too high. According to their data, the average rate of return for pension investments nationally is 6.88%, a figure they say is still too optimistic.
According to their data in 2020, 54 pension funds had a predicted rate of 7.5%, but 65% of those funds have lowered those expectations.
Pension funds are also investing more in riskier parts of their portfolios, which includes stock markets, real estate and hedge funds due to lower interest rates. According to Equable’s data, this type of investment is the largest in history, both in terms of the dollar figure ($1.63 trillion) and the 34% share of pension investments.
According to the report, taxpayers (with the employer contribution) are paying a bigger slice, as unfunded liability payments have increased by 64%.
Unfunded liability payments have increased 2,089%, going from less than $5 billion in 2001 to more than $100 billion in 2022.
Demographics are also playing a role in the unraveling of pension funds. In 2001, according to the report, 12.6 million active public sector workers supported 7.6 million retirees and beneficiaries. In 2015, the number of retirees eclipsed the number of active employees, with the latest data showing 14.2 million workers supporting 18.2 million retirees and beneficiaries.
Nationally, the report says unfunded liabilities slightly decreased from $1.57 trillion to $1.49 trillion, while it predicts the average funding ratio of state and local pension plans will improve from 75.4% to 77.4%.
The report also says these gains aren’t enough to improve the long-term financial outlook of these pension funds, requiring policymakers to increase the amount paid by state and local government employees, the taxpayer contribution or both.
The five states with the largest unfunded liabilities – Illinois, California, New Jersey, Texas and Pennsylvania – have a shortfall of $787.3 billion. This figure is slightly larger than the rest of the nation’s unfunded pension liabilities combined ($778.6 billion).
Also, the report says 33.7% of the unfunded liabilities in the five biggest states belongs to Illinois and California.
