This week the Pew Center on the States put out a report on state pensions and retiree health care costs.  Pew finds that

the gap between the promises states made for employees’ retirement benefits and the money they set aside to pay for them grew to at least $1.26 trillion in fiscal year 2009, resulting in a 26 percent increase in one year.

Of that gap, about $660 billion results from pensions (the rest is from retiree health care and other benefits).

As we discussed in our brief on pensions in Washington, many economists believe that the level of public pension underfunding is actually understated due to the high discount rate used by states (8 percent for most states, including Washington).  In the Pew report, “The $1.26 trillion figure is based on states’ own actuarial assumptions.”  As Pew explains,

This is an important issue because, depending on how those liabilities are calculated, states’ total funding shortfall for their long-term pension obligations to public sector retirees could be as much as $1.8 trillion (using assumptions similar to corporate pensions) or $2.4 trillion (using a discount rate based on a 30-year Treasury bond).  How states value long-term liabilities going forward will play an important role in defining the scale of their challenges and the actions they will have to take to meet them.