STUMP » Articles » Public Pensions Analysis: High-level Changes in Unfunded Liabilities as a Percentage of State GDP » 9 September 2020, 19:30

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Public Pensions Analysis: High-level Changes in Unfunded Liabilities as a Percentage of State GDP  


9 September 2020, 19:30

Thanks to the kind folks at the Equable Institute for giving me more background data from their report.

As I mentioned in my prior post on the Equable study, I noticed a very strong relationship between the unfunded pension liability (often marked UAL = “unfunded actuarial liability”) as % of state GDP, and the funded ratio for the state:

In the linear fit, for every 10 percentage points the funded ratio drops, the UL/GDP ratio increases by 2.75 percentage points.

That was for all the states in 2019 (and not weighted for the differences in GDP, and I will do a weighted fit another time).

I wondered how this relationship held over time, but I am beginning to find out all sorts of patterns in this data. So let us take a few different views on the issue.

Unfunded liability changes from 2001-2019

Here’s a slope line graph to emphasize the change (obviously there’s a whole path to get from the beginning to the end.)

So, pretty much all the states saw an increase in their unfunded actuarial liabilities from 2001 to 2019, except for a handful: Tennessee, West Virginia, Kansas, Maine, and Oklahoma. Some of these have very specific reasons for the improvement, and I will leave the analysis for that til another time.

But perhaps this isn’t quite fair. This is a 20-ish year stretch, and kind of slides over the big market drop in 2008-2009. Why not start at 2009 instead?

Unfunded liability changes from 2009-2019

I changed the line coloring on the top lines, so you can more clearly distinguish those that went up (aka, their unfunded liabilities got bigger faster than their GDP… this is bad) and those that went down (UAL grew more slowly than state GDP… or maybe it even shrank!)

Note: this does not include retiree health care, other ancillary benefits, or city/county-level pension plans. That’s why NY state looks so good — the execrably-funded NYC pensions aren’t included. Illinois doesn’t get much of a boost from excluding Chicago.

States that got worse in good times

Remember: there was a decade bull run from 2009 to 2019, no matter how you picked the beginning of your fiscal year.

Out of the 50 states + DC, 40 of them saw relative improvement in their unfunded liabilities compared to their state GDP. Those are the green lines going down.

That’s what one would hope to see in a long period of economic growth generally, so that states build up financial strength for their pensions during good times, so that when bad times come, they’re prepared. I’m happy to see that most of the states were able to improve their position relative to their pension debt in that period of growth.

The 11 states that did not improve: New Jersey, Kentucky, Illinois, Hawaii, Connecticut, Pennsylvania, Vermont, Oregon, Massachusetts, Wyoming, and Texas.

In some of the cases, the worsening situation was minimal (Texas increased their UAL from 4.7% of their GDP to 4.8% of their GDP, for example….that is too much dependent on actuarial assumptions that I wouldn’t credit that change much).

In others, like New Jersey… from 13.6% to 18.8% of their GDP.


That’s not good.

Why do we care?

Pension unfunded liabilities are usually quoted without reference to the size of the economy supporting those promises. The ratio of the UAL to the state GDP can give a good relative feel for how indebted each state is for their pensions.

As fun as it is for me to dig into historical trends, what we’re really concerned about is what will happen in the future.

I do think plenty public pension plans will actually be able to persist, that the benefits promised aren’t over-rich for the governments promising them, and that even should those specific plans go to pay-as-they-go, they would actually be able to have the benefits paid without too much strain.

But that isn’t true for the headline plans like New Jersey, Illinois, and Kentucky. It really shouldn’t require deep argumentation that those three states, specifically, are screwed with respect to pensions.

But where is the line drawn? Where does it tip over from just a bit of a squeeze to can’t possibly be paid?

Those three states I picked out specifically because they’ve pretty much always behaved badly with respect to their public pensions. And by the metric we see here, unfunded liability as a percentage of GDP, they are the worst.

What about other states, though? Where is the dividing mark? And may some of those states currently in the worst positions: Mississippi, New Mexico, Alaska, South Carolina, and Rhode Island — they have been on a good trajectory… maybe they’re salvageable?

Likewise, Connecticut has been rising in the disreputable ranks of public pensions, with a “disemprovement” at a slope similar to Kentucky’s. Is that something that will continue?

So once again, I thank those at the Equable Institute for sharing their data, and I have some more analyses to come out of their work.

The spreadsheet with the data and analysis can be found here.

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