Another chunk of the pension fundingshortfall came from assumption changes, with states mostly loweringthe assumed rate of return used to calculate pension costs. (Photo:Shutterstock)

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The funding gap for state pensions grew for fiscal year 2016,with a number of failures to reach sustainability.

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That's according to an analysis by the Pew Charitable Trusts, which examined 2016because it was the most recent year for which comprehensive datawere available for all 50 states. Among the problems it identifiedthat increased the gap were states coming up short on theirinvestment targets; setting those targets too high; andfailing toset aside enough money to fund pension promises made to publicemployees.

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The report says that in 2016, the state pension funds includedin the study cumulatively reported a deficit of $1.4 trillion,which represents an increase of $295 billion from 2015 and the 15thannual increase in pension debt since 2000. Overall, it found,state plans disclosed assets of just $2.6 trillion to cover totalpension liabilities of $4 trillion.

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Poor investment returns accounted for a major part of theshortfall, with the median public pension plan's investmentsreturning only about 1 percent in 2016. That's considerably belowthe median return assumption of 7.5 percent, and that disparityadded about $146 billion to the debt.

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Another chunk of the shortfall came from assumption changes,with states mostly lowering the assumed rate of return used tocalculate pension costs. That contributed for another $138 billionin increased liabilities.

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But even if markets had done better and met those high returnassumptions, it still wouldn't have been enough to meet planfunding obligations. Thanks to states not contributing enough tomeet their obligations to plans, the gap would still have risen byabout $13 billion. Overall, states would have had to kick in $109billion to pay for both the cost of new benefits and interest onpension debt; the actual amount contributed, $96 billion, fellshort.

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While preliminary information for 2017 points toward a boost inmarket returns lessening unfunded liabilities somewhat, the flipside of that is increased volatility that can easily go the otherway and increase risk to pension funds—particularly if statescontinue to fail to fully fund their obligations.

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Says the report, “Even small changes to projected returns cansignificantly increase liabilities. Pew applied a 6.5 percentreturn assumption, instead of the median assumption of 7.5 percent,to estimate the total liability for state pension plans and foundthat it would increase to $4.4 trillion—$382 billion more than thecurrent amount. The funding gap would then jump to $1.7trillion.”

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It adds that “Ultimately, differences in state pension fundinglevels are driven by policy choices, with well-funded states havingrecords of making actuarial contributions, managing risk, andavoiding unfunded benefit increases.” Most states are failing to doso, with only four states in the whole country at a funding levelof at least 90 percent—New York, South Dakota, Tennessee andWisconsin. Five states were less than 50 percent funded, and 17other states had less than two thirds of what is required.

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Marlene Satter

Marlene Y. Satter has worked in and written about the financial industry for decades.