Underfunded Public Pension Funds Causing State Budgetary Stress

February 23, 2006 (PLANSPONSOR.com) - US states' budgetary stress is rising due to increasing pension fund contribution demands at a time when costs are also escalating in other areas, such as education and Medicaid, according to a report released by Standard & Poor's Ratings Services.

The funded ratio for state pension funds has fallen dramatically since 2000, according to the report, which has resulted in a dramatic rise in state and local employer contribution rates.   Higher pension liabilities are pressuring the creditworthiness of these states despite their overall strong revenue performance.

The gross unfunded actuarial assumed liabilities (UAAL) of state pension plans had mushroomed to about $284 billion as of June 30, 2004, the report says.   On a state-by-state basis, the mean UAAL per capita was $1,183.   Added to a per capita state debt mean of $867, this results in a mean debt of $2,050.   The report said the average per capita debt to income ratio for states is 6.3%

In addition, the new GASB 45 rules for reporting on other post-employment benefits is expected to further add to long-term liabilities facing state and local governments.

Recent investment results would suggest that the climate could improve, the report said.   “With public pension funds on average exceeding their investment return assumptions for both fiscals 2004 and 2005, we should be looking at market value increases for pension assets.   However, on an actuarial basis, public funds will probably continue to experience modest declines in both assets and funding ratios for fiscal 2005,” the report said.   “If funds produce adequate investment returns in fiscal 2006, then we may see funded ratios begin to stabilize.”

The report titled “Rising U.S. State Unfunded Pension Liabilities Are Causing Budgetary Stress” can be accessed  here