State Retirement Funding Gap Doubles: Wilshire

March 16, 2004 ( - State retirement systems continued to struggle with slumping asset values and larger liabilities, and had twice as big a shortfall in 2003 as the year before, according to a new report.

Investment consulting firm Wilshire Associates said that it found a cumulative $366 billion shortfall among 123 state retirement systems it evaluated, compared with a $180 billion shortfall in 2002 (see  Wilshire: Public Pension Landscape Still Bleak ).

The 2004 Wilshire Report on State Retirement Systems: Funding Levels and Allocation also found that Illinois continued to suffer the largest gap – some $43.1 billion – and that the Prairie State was one of 16 states that have unfunded pension liabilities that exceed the state’s total budget (Illinois’ gap is 197% of the state’s budget).   However, Nevada’s gap, while numerically smaller, was larger on a percentage basis, some 269%.

For the state retirement systems covered in the study, pension assets fell 4%, while among those same systems, liabilities grew 6%.   The ratio of pension assets to liabilities, or funding ratio, for all 123 state pension plans combined dropped from 91% in 2002 to 82% last year, with the median state pension plan having a funding ratio of just 79%.

However, the Wilshire data may suffer some from the timeliness of the information provided by the state programs.   Wilshire notes that while fifty systems reported actuarial values on or after June 30, 2003, a nearly identical 51 systems reported values between June 30, 2002, and June 30, 2003 – a point at which much of the 2003 upswing in market values was likely not taken into account.   In its report, Wilshire noted that because many state pension plans report with a significant time lag, the funding ratios in the study do not fully reflect the recent bull market in stocks and, “…consequently, it is very likely that unfunded liabilities will decrease in future studies.”  

Only 64 of the 123 programs included in the report provided fiscal 2003 data, according to Wilshire.   However, for the 64 retirement systems which provided valuation data for fiscal year 2003, state pension assets fell 1%, while liabilities grew 5%, causing these plans to go from a $189 billion shortfall in 2002 to a $238 billion shortfall in 2003, while the funding ratio for those plans declined from 78% in 2002 to 74% in 2003.

Wilshire also acknowledged that the aggregate data can obscure important distinctions.   "It's important to note that the fiscal health of retirement plans varies widely," said Julia Bonafede, senior managing director of Wilshire Associates, in a press release. Bonafede went on to note that only two states (Florida and North Carolina, with funding ratios of 116% and 104%, respectively) have pension plans that continue to have assets that exceed their plans liabilities, while the pension plans of 14 states have funding ratios that fall below 70% (Colorado, Connecticut, Delaware, Hawaii, Illinois, Indiana, Louisiana, Maine, Massachusetts, Mississippi, New Hampshire, Oklahoma, Rhode Island, and West Virginia - which is lowest, with 40%).   Wilshire noted that, of the state retirement systems covered in the study, 93% are now underfunded, up from 79% in 2002 and 51% the year before that.

Indeed, Wilshire forecasts that state funding rations will increase from the 82% level reported in 2003 to approximately 85% this year.   However, Wilshire also anticipates a long term return on state pension assets equal to 7.2% per annum, which is .08% below the average actuarial interest rate assumption of 8%, according to the firm.   "If correct," Wilshire noted, "this asset performance shortfall will increase total unfunded liabilities for state pension plans by an additional $40 billion per year."

"Actuarial" Perspective

Further complicating matters is the choice of perspective.   Last September the National Association of State Retirement Administrators (NASRA) and the National Council on Teacher Retirement issued a report that found that more than half of 93 of the nation's larger public pension systems are more than fully funded (at the time of Wilshire's 2003 report) , at least when one considers status based on the actuarial value of assets, while another 16 have an actuarial funding ratio of between 95% and 100%.   That report was based on the actuarial value of assets, whereas Wilshire measures market value, according to what Keith Brainard, director of research at the National Association of State Retirement Administrators, told at the time (see  New Study Offers "Fresh" Perspective on Pension Funding Gap ).    

A year ago, officials of the National Association of State Retirement Administrators (NASRA) called the 2003 Wilshire study "alarmist" and said the document "presents a distorted and misleading view of the fiscal condition of state pension funds."   Both the latest report and a similar study issued in 2002 "employed selective use of statistics and illusory terminology to paint a bleak picture of the public pension plan universe," NASRA complained at the time (see  State Pension Group: Wilshire Research 'Alarmist' ).