Factoring in promises made by local governments to fund pension
benefits for their employees, total pension debt climbed to over $1
trillion as of June 30, 2012, the end of the most recent budget year
for which data is available.
"Even though we've seen recent market gains and reforms, the funding
gap has continued to grow for pensions," said David Draine, a senior
researcher at the Pew Center on the States.
Pew's study does not reflect the hefty gains in equity markets since
the second half of 2012.
Policymakers have grown increasingly concerned about the fiscal
health of state and local government retirement systems since the
financial crisis in 2008, when investment returns plummeted. Many
states also short-changed worker pension funds, against
recommendations by actuaries. In 2012, states missed an aggregated
$20 billion in required payments, Pew found.
"If (states) are able to make good payments in good times and bad,
then (they'll) be able to maintain," Draine said. "What we're seeing
instead is states making minimum payments on their credit cards and
letting costs grow in the future."
The gap in 2012 more than doubled since fiscal year 2008, when
states' unfunded pension liability was $452 billion. By 2010, that
gap had swelled to $757 billion, according to Pew's data.
In the last three years, only 14 states consistently made at least
95 percent of the contributions that actuaries required for their
pension plans. The remaining 36 states fell short of required
payments in at least one year.
California suffered the largest increase in unfunded liability, of
$19 billion. Illinois, Pennsylvania, New York and New Jersey also
saw large increases in unfunded liabilities.
Nine states saw their pension debt drop from 2010 to 2012: Idaho,
Maine, Missouri, Oklahoma, Oregon, Rhode Island, Tennessee, West
Virginia and Wisconsin.
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The stock market saw huge gains in fiscal year 2013, but only a few
states, such as Oregon, reflect the real benefit of that investment
revenue. Most state pensions smooth out sharp gains and losses over
a five-year period, so they would continue to feel the effects of
the recession until fiscal year 2013, according to Pew.
The same states would also divvy up the 2013 increases in revenue
through fiscal year 2018, so the benefits from the recent leaps in
the market would initially be more muted.
For the year covered by the Pew study, the benchmark Standard &
Poor's 500 index recorded a total return, including reinvested
dividends, of 5.45 percent, while bonds, as measured by the Barclays
U.S. Aggregate Index, gained about 7.5 percent. In the following 12
months the S&P 500 had a total return of nearly 21 percent while
bonds were near unchanged.
Pension funds on average have 60 percent or more of their assets in
equities and 40 percent or less in bonds. That would translate to an
investment return of less than 6 percent in fiscal 2012 for a
typical public employee pension fund compared with nearly 13 percent
the following year.
(Reporting by Robin Respaut; editing by Leslie Adler)
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