State pension funds in Oklahoma and Louisiana could face a “day of reckoning” in 2017, when they run out of assets and have to rely on state general revenues to pay pension benefits, new research shows.
Illinois, New Jersey and Connecticut could follow in 2018.
California could completely deplete its pension assets in 2026 and Texas in 2029.
In fact, no state system would be sustainable beyond 2042, according to an article by Joshua R. Rauh, associate professor of finance, Kellogg School of Management, Northwestern University. The article is posted on the Kellogg finance department's website, Everything Finance (http://kelloggfinance.wordpress.com/author/jra455/).
The best-positioned state in Mr. Rauh's rankings is Utah, whose pension assets wouldn't be all gone until 2042. Utah is followed by Delaware, 2040; South Dakota, 2035; New York, 2034; North Dakota, 2034; and Florida, 2033.
Mr. Rauh combined the pension systems in each state to arrive at his conclusions. (His research excluded North Carolina because of a lack of data.). He assumed the states would earn 8% on their investments and contribute to their pension plans the present value of any newly accrued benefits. In addition, he discounted the system's pension liabilities by the risk-free Treasury rate, an approach that raises total liabilities, instead of applying the common public-plan actuarial practice of using the expected rate of investment return.
States could face a catastrophic shock to their revenue needs by having to move to a pay-as-you-go system when their retirement systems run out of pension assets, Mr. Rauh wrote. Once their pension funds run out, the retirement system generally would have to draw a large proportion of state general revenue every year, based on 2008 tax revenue.
Among the worst, if Ohio's pension funds run dry in 2023, it will face $19.1 billion of benefit payments just in 2024, money that would come out of state general revenue, Mr. Rauh wrote. That amounts to more than 72% of the $26.4 billion in tax revenue collected in 2008.
For Illinois, having to pay $14.5 billion in pension benefits out of general revenue in 2019 would amount to 46% of $31.9 billion in 2008 tax revenue.
“For Louisiana, the corresponding figure is a smaller but still worrisome 28%” for 2018, he wrote.
Just to pay the pension benefits for only the first year after the pension fund is depleted, Oklahoma in 2018 would have to have $2.6 billion from the state's general revenue, which would amount to an estimated 31% of the state's 2008 tax revenue., Mr. Rauh wrote.
Colorado would have to draw $5.6 billion from state general revenue, equivalent to 59% of the state's 2008 tax revenue, in 2022, the first year after it runs out of pension assets. Mr. Rauh wrote.
Mr. Rauh, in response to a question, said he realizes even if a state has more than one retirement system, the “assets of one fund cannot be used to pay liabilities of another. But if fund 1 is about to run out and fund 2 has another couple years, it seems likely that the state will just throw all its contributions at fund 1 in those final years.”