A Warning on Many States’ Pension Liabilities

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State governments around the country face rapidly growing pension liabilities as the result of low returns and “weak” contributions, according to a new report from Moody’s Investor Services.

Based on compliance with new accounting rules, the report says, states’ adjusted net pension liabilities total $1.25 trillion for current employees and retirees. That amounts to 119 percent of their revenue in Fiscal 2015.

Moody’s said the situation could worsen in the next two fiscal years as market returns fall below states’ targets.

“The median return for public pension plans in FY 2016 was 0.52 percent compared to an average assumed investment return of 7.5 percent,” said Moody’s Vice President — Senior Credit Manager Marcia Van Wagner. “We project that aggregate state (adjusted net pension liabilities) will grow to $1.75 trillion in FY 2017 audits.”

The report also says that in Fiscal 2015 half of the states fell below a new “Tread Water” benchmark, meaning their pension contributions were too low to keep their unfunded net liabilities from growing.

Widespread state pension problems reflect similar problems facing federal programs such as Social Security and Medicare, which are not adequately funded to pay all promised future benefits. Political leaders at both the state and federal levels need to address these problems and prevent sudden benefit reductions by making farsighted decisions for sustainable budgets.

External links:
States’ FY 2015 Net Pension Liabilities Reach $1.25 Trillion, With More Growth to Come (Moody’s)

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