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Unfunded Liabilities from Sea to Shining Sea

It’s no secret that state pension plans are beset by obligations beyond their ability to fulfill them. A new study by State Budget Solutions (SBS) is the latest to outline how serious this problem is, based on 2014 data. Collectively, the states are nearly $5 trillion behind, a figure that’s $600 billion higher than in 2013, and the most troubled states are all over the country. 

When considering the fair market valuation of unfunded liability and the percentage of state pension liability that is funded, by SBS measures no state is worse off than Illinois. SBS says that Illinois is second among states regarding unfunded liability, at $331.6 billion, and has the worst funded level at 22%. Massachusetts also was among the top 10 in both measures. 

Winning the dubious race for highest unfunded liability is California, with $754 billion. New York came in just behind Illinois in third place, at $308 billion. Other states with unfunded liabilities of more than $100 billion are (in order of liability size) Texas, Ohio, New Jersey, Florida, Pennsylvania, Michigan and Massachusetts. 

Nine more states join Illinois with funding levels lower than 30%. In descending order of severity, they are Connecticut, Kentucky, Alaska, Mississippi, Kansas, New Hampshire, Hawaii, Massachusetts and North Dakota. 

The lingering effects of the Great Recession still beset state pension funds and funding, according to SBS. And low interest rates have hurt bond yields, which in turn affected fair market valuation of public pension liabilities, SBS says.

So what does this mean? SBS says it bodes ill for reasons beyond the obvious financial implications of such figures. The study points out that the fact that the Baby Boom generation is beginning to retire exacerbates the situation. And that will have a ripple effect, it argues, since as states have to devote increasing amounts of their revenue to cover pension liabilities they will be less able to pay for other public services for retirees and non-retirees alike.