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Unfunded Liabilities from Sea to Shining Sea

It’s no secret that state pension plans are beset by obligations beyond their ability to meet. A new study by State Budget Solutions (SBS) is the latest to outline how serious the problem — which is not unique to any particular region — is, based on 2014 data. Collectively, the states are nearly $5 trillion behind, and the figure is $600 billion higher than that of 2013.

When considering the fair market valuation of unfunded liability and the percentage of state pension liability that is funded, by SBS measures no state is worse off than Illinois. SBS says that Illinois is number two regarding unfunded liability, at $331.6 billion, and has the worst funded level — 22%. Massachusetts also was among the top 10 in both measures.

Winning the dubious race for highest unfunded liability is California, with $754 billion. New York came in just behind Illinois, at $308 billion. Other states with unfunded liabilities of more than $100 billion are (in order of liability size) Texas, Ohio, New Jersey, Florida, Pennsylvania, Michigan and Massachusetts.

Nine more states join Illinois with funding levels lower than 30%. In descending order of severity, they are Connecticut, Kentucky, Alaska, Mississippi, Kansas, New Hampshire, Hawaii, Massachusetts and North Dakota.

The lingering effects of the Great Recession still beset state pension funds and funding, according to SBS. And low interest rates have hurt bond yields, which in turn affected fair market valuation of public pension liabilities, SBS says.

So what does this mean? SBS says it bodes ill for reasons beyond the obvious financial implications of such figures. The study points out that the fact that the Baby Boom generation is beginning to retire exacerbates how serious the situation is. And that will have a ripple effect, it argues, since as states have to devote increasing amounts of their revenue to cover pension liabilities they will be less able to pay for other public services for retirees and non-retirees alike.