The Math Test That New Jersey and Illinois Are Nearly Flunking

(Bloomberg) -- It’s a math test that New Jersey, Illinois, and even Texas are nearly failing: How to pay for billions of dollars in unfunded liabilities for public-employee pensions and retiree health care.

They were among the six states that received a D minus grade, the lowest one possible, in a new report by the Volcker Alliance that scored how they’ve dealt with looming legacy costs over the past three years. Hawaii, Massachusetts, and Wyoming also received bottom grades, according to the non-profit organization founded by former Federal Reserve Chairman Paul Volcker to raise alarm bells about the long-term financial problems facing U.S. states.

"The costs increasingly threaten to crowd out spending on education, infrastructure, and other critical needs," the report said.

Sixteen other states didn’t do much better, earning an average D grade for the three-year period between 2016 and 2018. Just eight earned an A.

Still, states are starting to do a better job at contributing the amount recommend by actuaries to their retirement systems. Just 12 failed to make the actuarially required contribution in 2018, down from 16 in 2015, the report notes.

Kentucky, which has one of the worst-funded state pensions, was lauded by the Volcker Alliance for its progress on pensions, raising the state’s three-year average grade on legacy costs to a C this year. It boosted its contributions to pensions during the past two years after underfunding them for years, the report said.

It’s not easy for states to take on pension costs since benefits are often protected by state law. In 2015, the Illinois Supreme Court struck down a 2013 pension overhaul, saying it violated the state constitution’s ban on reducing retirement benefits.

"Devising a durable strategy to cover retirement promises made to public workers while continuing to provide essential services is a truly arduous task," the report said.

©2018 Bloomberg L.P.