JP Morgan took a look, back in May, at some metrics with regards to state pension and OPEB liabilities, called “ARC and the Covenants 2.0.” An interesting exercise, with some key data across all 50 states, with a highlight on the 6 states with some major pension and OPEB funding problems. Those six states? Illinois, as expected, stands at the top, followed by New Jersey, Connecticut, Hawaii, Kentucky, and Massachusetts. The study looks at the underfunded amount for each state, and gives some methodology by which each State could close the gap on a 30 year amortization schedule (assuming 6% return.) The potential solutions, including tax increases, non pension (OPEB) spending cuts, and increased employee contributions, are difficult, especially with the ratios that exist in the top 4 states. Hawaii and Massachusetts show numbers that could be managed (spending cuts vs tax increases) but that are still politically unpalatable. JP Morgan did not look at municipalities as part of this exercise. With the political problems attendant to facing this problem head on it is not surprising that in some states the problem continues to grow. When municipal liabilities are factored in, especially OPEB, the story likely gets much worse.

ARC and Covenants

The Boston Globe story that highlights the issues put forward by the study.

OPEB is “Other Post Employment Benefits”
ARC is “Annual Required Contribution”