Underfunded State Pension Plans Create Credit Risk

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Even after a year of healthy investment gains, many states have less money to fund their government pension plans, according to a new report from Standard & Poor’s, and some could face increased credit pressure.Even the most-troubled states, such as Illinois, which contributed no money to its pension plan in 2009, have enough assets set aside to continue funding current retiree plans. But states that continue to fail to meet required annual pension obligations could very well be penalised by the credit-rating services, negatively affecting their ability to borrow, said Gabriel Petek, a director at Standard & Poor’s and an author of the report.

“Given the generally strong credit profile of the state sector, we do not view pension liabilities as immediately jeopardizing state governments’ capacity to fund their service obligations, but we believe they can weaken a state’s relative credit profile,” the report said.

But Petek added, “To the extent that the liability gets larger from one year to the next would put upward pressure on the amount [states] should contribute both for the current year of service plus to retire their existing unfunded liability.”

The S&P report used a smattering of new 2010 data from some pension plans along with 2009 data to determine its list of best and worst performing states; it follows The Fiscal Times analysis of 2009 data from 121 state pension plans collected by Boston College’s centre for Retirement Research. While S&P did not disclose which plans it included in its research, its list of the best performing states, or states with the highest assets-to-liabilities funding ratio, included:

  • New York (fully funded) 
  • Wisconsin (99.8 per cent funded) 
  • North Carolina (96.7 per cent funded) 
  • Delaware (94.4 per cent funded) 
  • Washington (92.2 per cent funded) 
  • South Dakota (91.7 per cent funded) 
  • Tennessee (89.9 per cent funded) 
  • Nebraska (87.6 per cent funded) 
  • Florida (87.1 per cent funded) 
  • Georgia (87.1 per cent funded)

S&P’s list of worst performing states, or states with the lowest assets-to-liabilities funding ratio, included:

  • Illinois (50.6 per cent funded) 
  • West Virginia (56 per cent funded) 
  • Oklahoma (57.4 per cent funded) 
  • New Hampshire (58.3 per cent funded) 
  • Rhode Island (58.3 per cent funded) 
  • Kansas (58.8 per cent funded) 
  • Louisiana (60 per cent funded) 
  • Alaska (60.4 per cent funded) 
  • Kentucky (60.9 per cent funded) 
  • Connecticut (61.6 per cent funded)

The new data don’t show any large shifts in the top or bottom states from 2009 to 2010, but the outlook for states is far better given the upward tick of the stock market.

Nearly 60 per cent of state and local pension plans invested in stocks, have nearly doubled in value from lows in early 2009, according to economist Gary Burtless, a senior fellow at the Brookings Institution. Although increased stock values means more money flowing into the state’s coffers, because of the ways states account for gains and losses, those increases aren’t yet reflected in the results.

“These plans are still booking or recognising losses from the 2008 and early 2009 market decline, said Keith Brainard, research director for the National Association of State Retirement Administrators. Because states typically spread asset evaluations over a five to six year period, the asset-to-liability ratios will likely decline into 2013 and then go back up, added Brainard.

This post originally appeared at The Fiscal Times.

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