State Pensions

State Pensions
Pension funding has become an increasing burden on the states budgets over the past few decades. According to the Pew Charitable Trust, there is a growing gap between the assets and liabilities of the state pension funds. Since 2000, pension funding has been declining in relation to the growth in assets. This ultimately means that the pension funds are underfunded by an estimated $1 Trillion USD at the end of FY 2012.

In 2008, the year that the Great Recession hit, the stock market plummeted which resulted in a tremendous increase in unfunded liabilities for states and municipalities. Prior to the recession, states were assuming high rates of returns on their investments which in turn, allowed them to reduce their contribution to state employee pension funds. This discount ratio was entirely based on assumptions and still is today. The result of the false assumptions is the funding gap of $1 Trillion USD.

An additional factor in the state pension debt scenario is the use of defined benefit plans. These plans have detailed benefits that are promised to the employees associated with the pension fund. As a result, the states are having to reform pension fund regulations for new employees which means a reduction in their benefits as well as an increase in their contributions to the pension fund.

Funding gap that started in 2001 has grown to the $1 Trillion USD mentioned earlier, in just 11 years. At this point, the unfunded pension liabilities have grown to an unsustainable rate.

States are not allowed to declare bankruptcy to reorganize due to their own constitutions. At this point in time, the state pension debt is four times what is was a decade ago. According to Moody's Investor Service research, the state of Illinois has pension debt liabilities at 2.5 times their annual revenue.

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