U.S. states can expect little short-term relief from their retirement plan problems, according to a Moody’s Investors Service report that predicts their total unfunded liabilities will increase by 40% over the next two years.
States are already liable for an estimated $1.25 trillion in pension costs for current employees and retirees. Amid low fiscal 2015 and 2016 investment returns, that number will reach an estimated $1.75 trillion in fiscal year 2017, Moody’s said.
While the median target return for state pension funds was 7.5%, the actual median return was 3.2% for the period ending June 30, 2015, and a 0.52% for the period ending June 30, 2016.
“Some states have very large pension liabilities that they are having a hard time managing,” Marcia Van Wagner, a senior Moody’s analyst, said, adding that states “have not contributed sufficient amounts of money to their pension funds over a long period of time. They have a habit of underfunding their pensions.”
According to The Hill, Kentucky, New Jersey and Illinois are among the states where the pension crisis is the most severe amid large shortfalls between contributions to their pension funds and growing liabilities as more workers owed pensions retire.
“Legislators and governors in many states will have to decide whether to face some budget pain now or leave it to their successors to take on significantly more pain in the future,” The Hill said.
Moody’s found half of U.S. states did not put enough money into their retirement systems in 2015 to curb the growth of unfunded liabilities. Illinois’ liabilities are more than four times the state’s total tax revenue for a single year, while Connecticut, Kentucky, Alaska, New Jersey and Maryland all have liabilities that are more than twice what they take in annually in total taxes and fees.
Moody’s also warned that with stagnated inflation and flattened out markets, states can’t count on larger stock returns in the coming years.
“Pension funds are on a collision trajectory of rising liabilities and low returns,” ValueWalk said.