State pension funds are underfunded by $4.1 trillion, a figure far higher than the states have calculated, according to a report from State Budget Solutions.

The nonprofit group, founded in 2010 to urge states to reform their budgeting processes, said it used a fair market valuation that discounts liabilities at a risk-free rate, as opposed to the “optimistic” investment returns used by most plans.

The report found state pensions funded at 39 percent in aggregate; the states claimed a 73 percent rate.

States with the lowest funded ratio include:

Illinois, 24 percent.
Connecticut, percent.
Kentucky, percent.
Kansas, percent.
Mississippi, New Hampshire and Alaska, percent.

In addition to low funded ratios, states like Alaska, Ohio and Illinois also have some of the largest unfunded liabilities per person weighing in at:

Alaska, $32,425
Ohio, $24,893
Illinois, $22,294

State Budget Solutions noted that Moody’s and the Government Accounting Standards Board have been critical of the assumptions states make about their pension liabilities.

"This tragically amounts to $4.1 trillion in broken promises. Promises to taxpayers that public officials were managing funds appropriately and to pensioners who, quite frankly, did nothing wrong," Bob Williams, president of State Budget Solutions, said in a statement.

"Too many Americans worked their entire lives to now learn their states and local governments cannot provide what they promised. By not reining in this underfunded pension crisis sooner, elected officials betrayed the trust of citizens by putting politics before public employees, pensioners and taxpayers," he said.

In June, Moody’s released its own ranking of pension funds. Moody’s used a similar discount rate when comparing pension liabilities to state financial resources. Its calculations were similar to those used by State Budget Solutions.

“A fair-market valuation does away with optimistic investment return assumptions and instead uses a rate that reflects the risk of the liability itself,” State Budget Solutions said. “One common approach, taken here, is to discount liabilities according to the yield of a 15-year Treasury bond.”

The Accounting Standards Board acknowledged that rules it instituted last year would make pension funds appear weaker than under the old way they were calculated.

“The new standards will improve the way state and local governments report their pension liabilities and expenses, resulting in a more faithful representation of the full impact of these obligations,” GASB Chairman Robert H. Attmore said in a news release about the rule changes. “Among other improvements, net pension liabilities will be reported on the balance sheet, providing citizens and other users of these financial reports with a clearer picture of the size and nature of the financial obligations to current and former employees for past services rendered.”

Also read:

Feeling the pension pain in California
Liberal think tank thinks it has a better retirement plan
Pushing alternatives for state pension funds

Instant Insights /

State pensions underfunded by $4.1 trillion, study claims

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