Even Fiscally Fit States Are Not Off the Hook On Pensions

George Mason University’s Mercatus Center recently released a report “Ranking states by Fiscal Condition. “ Within the report housed a surprising revelation, those states which are thought to be fiscally sound are still expected to experience serious pension problems.

The highest ranking states are Florida, North Dakota, South Dakota, Utah and Wyoming. They are  fiscally sound due to their high levels of cash on hand, low unfunded pension liabilities and operating procedures. Nevertheless, the report goes on to explain:

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“While these top five states are considered fiscally healthy relative to other states because they have significant amounts of cash on hand and relatively low short-term debt obligations…each state, especially Wyoming, faces substantial long-term challenges related to its pension and healthcare benefits systems.”

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Fiscally Sound state measurements using a different metric

The report utilizes an evaluated method that seeks to underscore the true debt position of state pension plans based on recent actuarial reports. In addition, the report indicated the debt entanglement that exists between the state and local entities or municipalities are in fact binding.

“Although a state does not bear the entire financial responsibility for many of the multiemployer plans, state and local entities are connected through fiscal relationships… If a state-administered but locally funded pension plan were to experience distress, the municipality might seek state aid or pension reform measures from the state.”

fiscally sound

These advances presented in the report points to a better direction than otherwise observed in Governmental Accounting. Since 2015, the Governmental Accounting Standards Board (GASB) started requiring states to report their net pension obligations as long term liabilities. Nevertheless, the Mercatus report explains that such requirements do not go far enough to underlie the true picture of pension liabilities obligated by the state.

“Despite this, some problems remain in the reporting of pension liabilities…Most states continue to assess the value of their pension obligations using risky asset returns, thereby understating the full value of pension liabilities.”

This creates the pernicious affect of giving pension plans the appearance of financial health by downplaying the extent of their debt obligations.

See the full report here