Santa Monica, Calif. - Assets of large state pension funds fell 6% in 2002 while liabilities grew 10%, according to a new survey by Wilshire Associates Inc.
Of the 123 state funds in the survey, 79% are underfunded, according to Wilshire, up from 51% in 2001 and 31% in 2000.
Wilshire has more bad news. Stephen L. Nesbitt, senior managing director and author of the report, said the firm forecasts a long-term return on state pension assets of about 7.5% per annum, slightly below the funds' average actuarial interest rate assumption of 8%. That would increase total unfunded liabilities by an additional $10 billion per year, he said.
"Interest on their pension obligations, liabilities is growing by 8% per year, and we don't expect investments to be able to keep up with that," he said. The number could be even worse because some state pension funds report data very late, so funding ratios in the Wilshire survey "do not fully reflect the current bear market," Mr. Nesbitt said.
Illinois has the largest unfunded liability - $34.9 billion combined from the State Employees' Retirement System of Illinois, State Universities Retirement System of Illinois and the Teachers' Retirement System of Illinois.
Ratios below 70%
Five states have plans with funding ratios below 70%. West Virginia's employee and teachers' funds combined have the lowest funded ratio, at 45%. Other states on the list are Illinois, Indiana, Louisiana and Oklahoma.
Assets exceed liabilities at the state pension funds of only nine states: Arizona; California; Florida; Georgia; New York; North Carolina; Pennsylvania; South Dakota; and Wisconsin.
In 2001, 23 states had assets that exceeded liabilities, according to Wilshire.
(On the same day the Wilshire report was issued, Standard & Poor's Ratings Services, a division of McGraw-Hill Cos., New York, issued a research report saying public pension systems paid out $100 billion in retiree benefits in 2001. Because the general population is living longer, "pension and health care liabilities and the costs required to fund these obligations will continue to grow," the S&P report said.
Mr. Nesbitt said employer contributions to state pension plans are likely to double or triple over the next several years in an effort to eliminate unfunded liabilities.
And because benefit increases have fueled the increase in liabilities, public plan officials "will have to look at not being so generous with their benefit increases," he said.
The Wilshire report points to the "rapidly deteriorating financial health for state retirement systems over the last two years."
"In 2000, at the top of the bull market, state pension assets exceeded liabilities by $245 billion, and the ratio of assets to liabilities, the most common measure of pension fund health, stood at 115%," the report said. "Two years later, assets have fallen to $1.8 trillion, while liabilities have grown to almost $2 trillion. Over the last year alone, assets have fallen 6%, while liabilities have grown 10%. The result has been a decline in the difference between assets and liabilities from a positive $112 billion to a negative $180 billion, a $292 billion swing, and a decline in the ratio of assets to liabilities from 106% to 91%."
Wilshire found asset shortfall for statewide pension systems is similar to corporate pension plans. Wilshire estimated that defined benefit pension plan assets of the Standard & Poor's 500 companies totaled $885 billion, about $140 billion less than pension liabilities of just more than $1 trillion, resulting in a funding ratio for corporate plans of 86%.
Last year, the Wilshire report drew criticism from executives at Gabriel, Roeder, Smith & Co., Southfield, Mich., a consulting and actuarial firm, for its alarmist tone and lack of explanation of certain findings. The 2003 report follows a similar format. Paul Zorn, Gabriel Roeder's director of governmental research, had no immediate comment, saying executives there were still studying the new Wilshire report.