The potential time bomb of underfunded state pension funds lurks quietly in the background, unseen and unknown by most!
But like most issues that are ignored and that grow in size anyway, they don't go away but become known only when they reach crisis level.
In the corporate arena firms in the S&P 1500 that sponsor pension plans are 81% funded with an unfunded liability of $423 billion as of September 1, 2015 (Source). Generally a funded ratio of 80% is considered to be a healthy number.
A far different story for state government!
On the state government side, however, the average funded ratio (assets/liabilities) for the 50 states in 2014 was ONLY 36% ($2.7 trillion in assets with a $7.4 trillion liability) with an aggregate unfunded liability of $4.7 trillion (that's trillion with a T)! This compares to a funded ratio of 39% in 2013 and an unfunded liability of $4.1 trillion.
Part of the issue has of course been the unintended consequences of ZIRP or the 0% interest rate policy the Fed has had in effect for the past 7 or so years. It's also occurring despite the fact that the stock market has performed quite well since the 2009 post-financial crisis low.
Another issue, and one that takes the above issue into account, is the high rate of return that plan sponsors will typically assume that is difficult, if not impossible, to achieve under the aforementioned conditions in the fixed income market.
Finally, and going out on a limb, I would venture to guess that another issue is the fact that states may divert monies earmarked for pension funds into other state expenditures or, in other words, rob Peter to pay Paul.
(all numbers in thousands except for "Unfunded Liability Per Capita") *Market Liability is the Fair Market Valuation of the combined state plans' liability. The fair market valuation discount rate for 2013 is 2.734%.
Michael Haltman is President of Hallmark Abstract Service in New York. He can be reached at firstname.lastname@example.org.
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