BOSTON | Massachusetts taxpayers kick in more than $1 billion a year to make up for the state's failure to invest in its workers' retirement decades ago.
The state's $50 billion pension fund is $14.5 billion short of the reserves it needs to earn enough to pay the pensions owed to retirees. So taxpayers must make up the difference.
The state owes another $13.3 billion for the health care benefits promised to its workers and will have to devote more tax money to pay off the debt in coming years.
If there's any good news, many other states struggling with the same problem are in far worse shape.
"You're definitely not alone," said Parry Young, director of the public finance department at Standard & Poor's, the New York bond-rating agency.
Nationwide, states' unfunded pension liabilities to retirees total $284 billion, according to a 2004 S&P; report. The figure represents the difference between the money set aside to pay the pensions of current and future retirees and the amount that those retirees have actually earned.
Massachusetts' $14.5 billion unfunded pension liability, while a lot, looks manageable compared to those of some states, said Ronald Snell, director of state services at the National Association of State Legislatures.
A key measure of a pension fund's soundness is what percentage of its obligations are funded. Massachusetts' $50 billion pension fund is 82 percent funded.
"Massachusetts is in a less serious group," Snell said. "Rhode Island is 65 percent funded. So 80 percent is good."
Massachusetts, unlike some states, contributes annually to the pension fund to complement the pension fund's investment returns, plus an additional sum to help the fund become self-sufficient or, in investment lingo, fully funded by 2023.
In the 1960s and 1970s, a number of states began to shift from a pay-as-you-go system that pays pensions out of annual budgets to investing for the long term, Young said. Massachusetts only started doing that in the late 1980s.
Still, there are other states playing catch up. West Virginia last year pumped $878 million into its pension fund, while Washington state contributed $250 million, Snell said
States are hoping the rising stock market helps close the gap.
"All states to one degree or another are hoping investment returns will continue to be solid and reduce those unfunded liabilities," said Keith Brainard, research director for the National Association of State Retirement Administrators.
Few states, meanwhile, have gotten a grip on their health care liabilities.
New federal regulations required state and local governments to disclose what they owe for care for active and retired employees. JP Morgan Chase and Co. has estimated the total at as much as $1.3 trillion.
Massachusetts' health care liability is by no means the largest. California could owe as much as $200 billion. New York State has pegged its liability as high as $54 billion
Massachusetts took a critical first step toward addressing the problem when, at Gov. Deval Patrick's urging, the Legislature put aside $343 million in an investment fund, the proceeds of which will pay for the cost of future retirees' health care.
Most state governments, however, are just now grappling with how to handle the problem.
"Ohio has set aside money for a number of years," Young said. "But they are the exception."
Most other states are trying to figure out what to do, from cutting benefits to creating investment trusts. Others are looking at continuing on a pay-as-you-go basis.
What states are up to will become clearer when their fiscal 2008 budgets are released.
"Many are kicking around various options," Young said.
Pension
July 30, 2007
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