These State Pensions Are Most Likely to Enforce Benefit Cuts

A new research note from Moody’s found that State pension funds were underfunded by $1.3 trillion at the end of FY15 but was expected to grow to $1.8 trillion at the end of FY17 as pensions continue to struggle with low returns. We’ve discussed the unintended consequences of the Central Bank’s low-rate polices on pension funds multiples times (see “Pension Duration Dilemma – Why Pension Funds Are Driving The Biggest Bond Bubble In History”)…with the two most likely outcomes being benefits cuts for pensioners and/or crippling tax hikes for citizens.

Total US state aggregate adjusted net pension liabilities (ANPL) totaled $1.25 trillion, or 119% of revenue in fiscal 2015, Moody’s Investors Service says in a new report. The results, based on compliance with new GASB 68 accounting rules, set a new ANPL baseline and are poised to rise for the next two fiscal years as market returns fall below annual targets.

“The median return for public pension plans in FY 2016 was 0.52% compared to an average assumed investment return of 7.5%,” Moody’s Vice President — Senior Credit Officer Marcia Van Wagner says. “We project that aggregate state ANPL will grow to $1.75 trillion in FY 2017 audits.”

The states with the highest pension burdens — measured as the largest three-year average ANPL as a percent of state governmental revenue — were consistent with previous years. Illinois topped the list with pension liabilities at 280% of total governmental revenue, followed by Connecticut (Aa3 negative) at 209%, Alaska (Aa2 negative) at 179%, Kentucky at 162%, and New Jersey at 157%.

Given that pretty much every state pension is now underfunded, Moody’s introduced a new metric which they referred to as the “Tread Water” benchmark. The largest underfunded plans in Kentucky, Illinois and New Jersey would require an incremental 7 – 7.5% of annual state revenue for contributions in order to simply stop unfunded liabilities from growing further. (Read more from “These State Pensions Are Most Likely to Enforce Benefit Cuts” HERE)

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