U.S. State Pension Deficits to Widen as Investment Gains Shrink

  • The gaps to increase over next two years, Moody’s report says
  • Half of states didn’t contribute sufficient amount to pensions

The shortfalls in U.S. state pension funds are poised to increase over the next two years as investment returns lag forecasts and many governments fail to set aside enough to cover promised benefits, according to Moody’s Investors Service.

The unfunded liabilities already stood at about $1.25 trillion in the 2015 fiscal year, which ends in June for most states, the rating company said in a report released Friday. The retirement plans’ investments were battered by stock-market volatility over the following year, leaving an average return of about 0.5 percent, far less than the 7.5 percent growth they typically assume, according to Moody’s.

The lackluster gains mean that governments must put more taxpayer money into the funds to keep the deficits from growing. States with large unfunded pension liabilities include Kentucky, Illinois, New Jersey and Texas, none of which have been making sufficient annual contributions, Moody’s said.

"The difficulty such states have in adequately funding pensions is likely to worsen as contribution shortfalls exacerbate the impacts of unfavorable market and demographic pressures," the report said.

Half of states didn’t contribute enough in the 2015 fiscal year to keep their retirement systems from falling further behind. Utah, Oklahoma, Michigan, West Virginia, Maine, South Dakota, and Louisiana were among the states whose pension contributions "significantly exceeded the amount needed to tread water."

Moody’s expects total state pension liabilities will grow to 9 percent of the nation’s gross domestic product in fiscal 2016, up from 6.9 percent. With local government liabilities factored in, Moody’s projects that the total public pension burden will be 22 percent of GDP in 2017.

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