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State Pension Funding Gap Narrows, But…

A new report finds a nice improvement in public pension plan funding in fiscal 2014 – but cautions that things may have slipped since.

The report, by the Pew Charitable Trusts, notes that in fiscal year 2014, the nation’s state-run retirement systems had a $934 billion gap between the pension benefits that governments have promised their workers and the funding available to meet those obligations – a $35 billion decrease from the shortfall reported for fiscal 2013. That reduction in pension debt was driven primarily by strong investment results, with public plans in fiscal 2014 averaging a 17% rate of return, according to the report.

The brief focuses on the most recent comprehensive data from all 50 states and does not reflect the impact of weaker investment performance in fiscal 2015, which averaged 3%, according to the report, which goes on to note that the first three quarters of fiscal 2016 have seen negative average returns. Indeed, total pension debt is expected to be more than $1 trillion for state plans, an increase of more than 10% from fiscal 2014. When combined with the shortfalls in local pension systems, this estimate reaches more than $1.5 trillion for fiscal 2015 and will likely remain close to historically high levels as a percentage of U.S. gross domestic product (GDP).

The lesson here, notes Pew, is that state and local policymakers cannot count solely on investment returns to close the pension funding gap over the long term; they also need to follow funding policies that put them on track to pay down pension debt.

Speaking of that, the two states with the lowest funding ratios were Illinois and Kentucky (both funded at just 41%), just ahead of New Jersey (42%). The highest funded ratios were in South Dakota at 107%, Oregon at 104%, and Wisconsin at 103%.