(Bloomberg) -- The finances of more than two-thirds ofU.S. state pension plans improved infiscal year 2014, as a soaring stock market boosted returns andmany states stopped incorporating losses from the recession intotheir pension calculations.

The median state pension last year had 70 percent of the assetsneeded to meet promised benefits, up from 69.2 percent in 2013,according to data compiled by Bloomberg.

It was the second straight increase in pension funding. Publicpensions had median investment gains of 16.9 percent for the 12months ended June 30, 2014 according to Wilshire Associates.

“It’s generally agreed that 2014 was mostly a year ofimprovement for public pension funds,” said Josh Gonze, who co-manages $10.5 billion of municipal bonds at Thornburg InvestmentManagement in Santa Fe, New Mexico. Thornburg’s $7.3 billionLimited Term fund is the 13th largest open-end tax-exempt mutualfund, according to data compiled by Bloomberg.

The Federal Reserve’s policy of keeping short-term interestrates near zero and an improving economy boosted the Standard &Poor’s 500 Index of U.S. stocks by 24.6 percent in the 12 monthsthrough June 30, 2014 including dividends, helping to ease thestrain on public pensions.

Broad numbers mask big differences in the health ofpublic pensions between states. Eightof 13 states whose funding level declined were states withbelow-average funding levels.

“We have states that seem to be in genuine trouble,” Gonze said,listing Illinois, Kentucky, Alaska, and New Jersey. “And clearly states thatare not in any trouble at all.”

Illinois, with a pension shortfall of more than$100 billion, remains the state with worst-fundedretirement system, with a ratio of assets to liabilities of 39.3percent, followed by Kentucky at 45 percent and Connecticut at 50.4percent.

In May, the Illinois Supreme Court struck down a 2013 pensionoverhaul saying it violated the state constitution’s ban onreducing worker retirement benefits. The ruling highlighted thelack of legal flexibility some states have in addressing theirpension funding deficits.

Accounting change

New Jersey’s pensions are projected to run out of assets to payliabilities between 2021 and 2032, depending on the retirementsystem, under new accounting rules that most states beganimplementing in 2014, according to Moody’s Investors Service.

New Governmental Accounting Standards Board rules require publicpensions to use a lower discount rate to value liabilities forplans with projected asset depletion dates and market value ratherthan the actuarial value of assets among other things.

Puerto Rico, Illinois, and New Jersey are the three issuerswhose pension funding deficits are serious enough that Thornburg isavoiding their securities, Gonze said.

Thornburg’s limited term fund focuses on debt maturing in 10years or less.

More retirees

Loop Capital Markets, in a report last month, said it expects“continued bifurcation” among governments in terms of the fiscalhealth of their pensions.

“A combination of strong pension protections, coupled with lowfunded levels, should be especially noted as they indicateescalating budgetary pressure,” Loop’s report said. “For thoseperennially struggling with funding pension payments and low fundedlevels, these pressures are not expected to abate withoutsignificant change in plan fundamentals.”

States that had the biggest improvement in funding includeIdaho, whose pension funding ratio rose 7.6 percentage points to93.1 percent, and Oklahoma, whose actuarial value of assets dividedby actuarial accrued liabilities gained 6.5 percentage points to 73percent.

In the last six years Idaho’s pension funding has improved by19.2 percentage points, the most of any state, according to datacompiled by Bloomberg.

Michigan’s pension funding ratio has declined the most duringthat period to 59.9 percent from 83.6 percent. Michigan is one ofthree states, including Alaska and Ohio that have more retiredpublic employees than active members, according to Loop.

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