Highly underfunded state pension plans could threaten their states' ability to issue debt at reasonable rates, according to a Loop Capital Markets report.
The report said the underfunding could be made worse by “unrealistic projected investment returns” that average 7.83% for the 241 plans reviewed.
Based on per capita economic debt — state general fund deficits, net bonded debt and pension obligations — the top five most indebted states in the report are Connecticut, Hawaii, Rhode Island, Illinois and Alaska.
Chris Mier, managing director and strategist for Loop Capital, an institutional broker-dealer, said some states will find it politically difficult to increase taxes, reduce benefits or find other ways to deal with funding problems.
“It's going to be a painful time for states in particular to make the contributions they need to make to their pension fund,” Mr. Mier, who wrote the report, said in an interview. “State budgets are likely to be constrained for the next two to three years. There are people who say that is too optimistic.”
Retooling plans' investment strategies to focus on safer assets like bonds and Treasuries is “vitally needed,” according to the report.
