April 25th, 2011

U.S. states’ deficits in their employee retirement systems widened by 26 percent in fiscal 2009 as governments were stung by investment losses and failed to pay enough into their pension funds, a study found.

The deficits, or the difference between the retirement and health-care benefits states have promised their employees and the assets set aside to fund them, grew to $1.26 trillion by the end of the 2009 budget year from $1 trillion a year earlier, the Pew Center on the States said in a report released today. The fiscal year ends in June for all but four states.

The gaps are straining governments that have yet to fully recover from the recession and are stoking political fights in states such as New Jersey, Ohio and Wisconsin over the workers’ benefits. They have also drawn scrutiny in Congress, where Republicans have held hearings into the risks posed by underfunded pensions and backed legislation that would bar the federal government from bailing out any ailing funds.

“The states dug themselves a big hole before the recession ever hit,” Susan Urahn, the managing director of the Pew Center in Washington, said in a conference call with reporters yesterday. “We can see how the Great Recession and states’ severe budget problems made a serious problem even worse.”

The data from the 2009 fiscal year provide a snapshot of the pension funds during the worst of the financial crisis.

The median pension plan lost 19 percent that year, according to figures cited in the Pew report. The setback may continue to weigh on states that count on annual returns of about 8 percent and use accounting methods to spread their losses across years.

Long Legacy

In 2009, state retirement systems had 78 percent of what they needed to pay for promised pensions, according to the Pew Center, down from 84 percent a year before.

“Pension funding levels are stabilizing after the steep investment losses caused by the 2008 Wall Street collapse,” Urahn said. “But the legacy of the recession will be evident on pension-fund balance sheets for some time.”

The unfunded liability in state-run pension plans rose to $660 billion in 2009 from $452 billion a year earlier, according to the Pew Center’s figures, which rely on the funds’ expected rates of return to calculate long-term liability. That deficit projection would grow to $1.8 trillion under corporate-style accounting methods, which use lower expected returns.

Health-Care Bills

The states are also facing the rising cost of employee health care benefits that, unlike pensions, are largely financed as the bills come due. Such expenses accounted for $604 billion of the retirement systems’ deficits, according to the Pew Center’s report.

Those health-care obligations may squeeze large states if medical costs keep rising as baby boomers retire over the next decade, Urahn said.

“That annual bill is going to really rocket up,” she said.

The biggest unfunded pension liabilities in 2009 were in Illinois, which had just 51 percent of what it needed to pay for promised benefits, and West Virginia, with 56 percent, according to the report. New Hampshire was 58 percent funded, while New Jersey and Ohio both had just two-thirds of what they needed.

On the other end of the spectrum, the pension plans in New York and Wisconsin were fully funded.

Some states worsened their problems by not making full payments into their pension funds each year. Pennsylvania paid only 31 percent of its required contribution in 2009 and New Jersey 36 percent, according to the report. Both Wisconsin and New York made their full payments.