Step forward, California and Illinois!
Your state and local pension funds are so badly funded that you two states, alone, account for about a third of the entire pension fund crisis of the entire country.
California’s public-sector pensions have a staggering accounting hole of $274 billion, according to the latest report from the Equable Institute think-tank. Illinois’ pensions are in the hole to the sum of $210 billion—and you could argue that is even more remarkable because Illinois is a much smaller state.
Illinois’ pension funds have only half the assets they need, according to the report. That’s right: They’re 50% funded. Only little Kentucky (47% funded) is worse.
“Most state and municipal pension plans in the U.S. are distressed or fragile,” Equable reports. For them, “fragile” means less than 90% funded. “Distressed” means less than 60% funded.
In total, the accounting holes in America’s state and local pension funds jumped by nearly a half last year to $1.45 trillion. The overall funding ratio fell from 84% to 77%. Meaning, in other words, that America’s state and local politicians have committed to $1.29 worth of payouts for every $1 in plan assets.
That is going to set up clashes sooner or later between taxpayers, state and local employees and retirees, and investors in municipal bonds. The city of Detroit ended up in bankruptcy in 2013. The Commonwealth of Puerto Rico went through an extensive restructuring and effective bankruptcy from 2016 until last year.
Some conservatives, including GOP Senate leader Mitch McConnell, have said they are open to states declaring bankruptcy. That would allow, or force, states to renegotiate commitments they couldn’t meet.
First in line? Maybe McConnell’s home commonwealth of Kentucky, which has the worst-funded pension system in the country.
The accounting holes in these pension funds widened so dramatically last year because of the terrible returns in the stock and bond markets. But the real figures may be even worse than they appear, warn Equable. That’s because public sector pensions are increasingly invested in “private equity” funds, and these funds report their returns about 6 months in arrears. So we haven’t really seen all of 2022’s bad news show up in the numbers yet.
(And even these numbers will depend on private calculations of what investments are “really” worth, rather than on the open, transparent valuations set by the stock and bond markets. Make of that what you will.)
There’s a “Dirty (Half) Dozen” of states right at the bottom of the funding pile with especially badly-funded systems. Kentucky, Illinois, New Jersey, Connecticut, South Carolina and Mississippi all have funding ratios below 60%, meaning they still don’t know where to find 40 cents for every $1 in pension fund payments they owe. Half of all states have funding ratios below 80%.
On the positive side, giant New York state — whose bonds make up the biggest component of the municipal bond indexes — is a reasonably respectable 94% funded. And Washington state, miracle of miracles, actually has a (small) surplus. For now, anyway.