67% of state debt tied to pension liabilities, budget reform group says

Market-valued unfunded public pension liabilities made up 67% of all state debt, according to a report Tuesday by State Budget Solutions, a non-profit organization advocating state budget reform.

The group's third annual state debt report, which looked at combined debt and future spending obligations in all 50 states as of Dec. 31, found that $2.8 trillion of the $4.19 trillion total debt total goes toward pension liabilities.

Total state debt is down 1.2% from $4.24 billion a year earlier, but the five states with the most debt did not change, although New York and Texas moved higher up the list.

California tops the debt list with more than $617 billion, followed by New York with $300 billion; Texas, $286 billion; New Jersey, $282 billion; and Illinois, $271 billion.

The states with the least debt are Vermont, North Dakota, South Dakota, Wyoming and Nebraska.

SBS used several sources to calculate pension liabilities, including the Pew Center on the States and the American Enterprise Institute, which use 2010 pension data. The overall debt figures came from each state's 2011 Comprehensive Annual Financial Report.

The report advocates using risk-neutral mark to market to calculate pension liabilities, arguing that traditional smoothing methods used by states to measure their unfunded pension liabilities over a longer time period “hide the true enormity of state debt obligations” and cause states to continually underfund their pension systems. While traditional calculations lead to unfunded pension liabilities of $760 billion, that figure jumps to $2.8 billion under a mark-to-market valuation of those liabilities. “A comprehensive view of state debt without accurately assessed public pension liabilities disguises the problem to the tune of as much as $2.1 trillion,” the report notes.

SBS President Bob Williams said his group is working with political leaders at the state and municipal level to change their pension funding calculation methods, and to recognize the impact of pension liabilities on state budgets. “In some states, the average legislator only knows about general obligation debt, and (pension debt) is not readily identifiable,” Mr. Williams said in an interview. “Some states agree with the calculation, and some states want to go into denial. It depends on the state.”