The economic crisis has taken its toll on U.S. states’ finances, both via falling tax revenue due to a weak economy and horrendous returns for pension funds due to market turmoil.
Latest data from the Pew centre shows that state pension funds are short at least $1 trillion, and given that this latest data is already quite old (it’s as of the first half of 2008), this pension shortfall number is likely to be far higher today:
Because the analysis did not encompass the final six months of calendar year 2008 — most states’ fiscal year’s end during the summer — it does not include the market downturn that devastated many funds’ investment portfolios.
“The funding gap will likely increase when the more than 25 per cent loss states took in calendar year 2008 is factored in,” the report said.
A pension fund is considered healthy if it has a funding level equal to at least 80 per cent of its liability. In fiscal 2008, 21 states were below that mark, compared to only 19 states in fiscal 2006.
The rate of decline has been rapid, the centre said. In fiscal 2000 half of the 50 states had fully funded their pension systems but by fiscal 2008 only four — Florida, New York, Washington and Wisconsin — could boast being able to cover their costs.
States have been clearly ignoring this problem given the sudden deterioration. Perhaps its because they know that in the end the federal government can bail them out.
“Over the last 10 years, many states have shortchanged pension plans in good times and bad,” said Susan Urahn, the centre’s managing director, who called the beginning of the century a “decade of irresponsibility.” States did not save for the future and manage costs well, said Urahn.
Describing state pension funds as operating similarly to credit card holders who make minimal monthly payments on their debt but continue to charge, Urahn said the funds were making their problems worse by not preparing for impending retirements.
The danger is that should even a single state be bailed out in any way, say such as California, this problem of ignoring funding needs would likely get worse and arguments for federal help would intensify.