State pension systems such as those in Illinois, Kansas and New Jersey are in a “death spiral,” with assets at many insufficient to cover benefits, payouts consuming a growing portion of resources and costs rising twice as fast as investment gains.
Less than half of 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 Sept. 15. Two years earlier, only 19 missed the mark. Illinois covered just 50.6% of benefits last year, the lowest funded ratio.
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 executives to keep money in short-term low-return investments to pay benefits, reducing chances the pension funds can earn their way back to financial health.
“Once you get into that dynamic, you're in a death spiral,” said Michael Aronstein, who manages the $295 million Marketfield Fund of stocks as chief investment strategist at Oscar Gruss & Son, a New York brokerage. “There's no financial or return solution.”
The largest Illinois pension fund, 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, its spokesman. The $124.8 billion New York State Common Retirement Fund, Albany, the best-funded in the Bloomberg data at 107.4%, paid out 7% of its assets in fiscal 2009.