Report: State Pension Liabilities Now Exceed $1 Trillion


U.S. states’ collective net pension liabilities surpassed $1 trillion for the first time in fiscal 2017. That’s up nearly 11 percent from $892 billion for fiscal 2016, according to Fitch Ratings’ 2018 State Pension Update.

Increases in the present value of future pension benefits and “lackluster” investment returns on pension assets fueled fiscal 2017’s increase in net pension liabilities, according to Fitch’s analysis. Other factors came into play, as well.

“Tremendous variability exists from state to state,” the Fitch Ratings report’s lead author, senior director Douglas Offerman, told “The really consistent message in this report, as well as in recent years, is that states that shirked their annual contributions are the ones facing the biggest challenges today, even if they’ve since corrected the contribution problem.”

A variety of factors help explain the differences in states’ pension liability burden, as well as the rising trend of net pension liabilities nationally, Offerman said.

For example, Illinois’ definition of pension funding, generally, is still weaker than that of other states. Pension contribution funding is based on legal statute in many states. In its funding policy, Illinois doesn’t seek to hit its 100 percent funding target, Offerman pointed out. Illinois’ pension contribution problem has not been fully corrected, but its contribution practices are better than they used to be, he noted.

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“When you just pay in 100 percent of your actuarial contributions every year, you’re a lot less likely to run into trouble,” Offerman said. “Tennessee has been hitting its actuarial pension contribution targets for decades and their net pension liabilities are well covered.”

That stands in contrast to states such as Kentucky and Illinois, which have been contributing less than 100 percent of their actuarial targets, he said. Similarly, Virginia and Maryland lowered the amount they were paying into state pensions as a means of gaining overall budget flexibility for a period of time.

Virginia has taken steps to correct that by raising pension contributions and lowering investment return assumptions. That has put the state’s pension system on a better fiscal track, but the damage has been done.

“Virginia’s funding gap widened and the difference between the value of pension assets and liabilities increased pretty substantially as a result of cutting contributions in the past and making earnings assumptions that were too high,” Offerman said.

Colorado is another state that had not been meeting its actuarial pension funding targets. The situation is a bit different there than in Kentucky, Illinois and Virginia, however, Offerman noted.

“For Colorado, we’re waiting to see the next financial statements,” Offerman said. “Some important pension reforms have been passed and the state Supreme Court made a very helpful decision a few years ago. I wouldn’t put Colorado in the same group, but that doesn’t mean they aren’t facing challenges.”

The Colorado General Assembly enacted new legislation governing state pension management earlier this year.

“Senate Bill 18-200 … was the result of the PERA Board’s legislative recommendation designed to reduce the risk profile of the plan by shortening the length of time it will take the trusts to reach full funding,” Katie Kaufmanis, spokeswoman for the Colorado Public Employee’s Retirement Association, said.

PERA’s liabilities decreased by $3.4 billion with the enactment of SB 200, Kaufman noted. Furthermore, the legislation incorporates mechanisms by which PERA will stay on a path toward full funding in 30 years – automatic adjustments to contributions and annual increases prominent among them, Kaufmanis said.

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“Most Colorado PERA employers do not participate in Social Security, so the benefits being earned by PERA members replace a Social Security benefit and serve as a pension,” Kaufmanis said. “SB 200 achieved the stated goal of reducing the time it will take to reach full funding for each of the PERA trusts — State, School, Local Government, Denver Public Schools, and Judicial.”

Fitch and other state pension financial analysts compare state net pension liabilities and median, long-term liabilities with state personal income.

Nationally, the ratio of net pension liabilities to personal income rose to 3.6 percent in fiscal 2017.

The ratio of median, long-term liabilities to personal income rose from 5.8 percent in fiscal 2016 to 6 percent in fiscal 2017, a level Fitch considers low relative to their resources. Those levels vary widely among individual states, however. The pension liability burden is highest in Illinois, at 29 percent of personal income. It’s lowest in Nebraska at 1.5 percent, Fitch highlights.

Individual states’ pension liabilities, combined with bonded debt, varies widely, as well. At 29 percent of state personal income, Illinois has the highest long-term liability burden among U.S. states. Six others have long-term, pension liability burdens Fitch considers elevated — above 20 percent of personal income. Eight states have long-term liability burdens Fitch considers moderate — 10-20 percent. Nebraska has the lowest — 1.5 percent.

A version of this article previously appeared on under the headline “Fitch: State pension liabilities now top $1 trillion.”

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