State pensions such as Illinois, Kansas and New Jersey are in a “death spiral,” with insufficient assets to cover benefits, payouts consuming a growing portion of resources and costs rising twice as fast as investment gains.
Less than half the 50 state retirement systems had assets to pay for 80% of promised benefits in their 2009 fiscal years, according to data compiled for the Bloomberg Cities and Debt Briefing in New York on Wednesday. Two years earlier, only 19 missed the mark. Illinois covered just 50.6% of benefits last year, the lowest funding ratio, which actuaries say shouldn’t be less than 80 percent.
Benefits paid by funds in at least 14 states equaled more than 10% of assets in the fiscal year, the figures show. In 2007, none exceeded the threshold. The growing burden prompted Colorado, Minnesota, Michigan and other states to trim benefits for millions of teachers and government workers. It also forced fund managers to keep money in short-term low-return investments to pay benefits, reducing chances pension funds can invest their way back to financial health.
The $33 billion Illinois Teachers’ Retirement System, Springfield, paid $3.7 billion of benefits in the year ended June 30, 2009. That’s 13% of its assets at the time, up from 8% two years earlier, according to annual reports and Dave Urbanek, the system’s spokesman. The $124.8 billion New York State Common Retirement Fund, Albany, the best-funded in the Bloomberg data at 107.4 percent, paid out 7% of its assets in fiscal 2009.
As of last June 30, after the Illinois fund’s investments had gained 13% and lawmakers borrowed $3.5 billion to shore up the system, benefits in the fiscal year had risen to $3.9 billion, according to Mr. Urbanek, or 12% of assets.
Lawmakers in Illinois, which, with California, has the lowest credit rating from Moody’s Investors Service of any state, were unwilling to approve another bond sale, for $3.7 billion, this fiscal year. As a result, the pension may sell $3 billion of assets to cover benefits, Mr. Urbanek said.
“Death spiral is too harsh a language,” he said. “It’s a concern, but we’re not on life support.”
Benefits paid by the 100 largest public pensions in the five years that ended June 30 grew an average of 8% annually, calculations based on U.S. Census Bureau reports show. In that period, the median annualized investment return was about 3% for public funds with more than $5 billion of assets, said an August report from Wilshire Associates.
The U.S. recession and stock market collapse drained about $835 billion of value from the 100 largest public funds, according to the Census Bureau. As a result, benefit payments by those funds amounted to 7.5% of assets in the 12 months ended June 30, 2009, up from about 5% two years earlier, the census figures show.