To make up for losses stemming from the financial crisis and the recession it spurred, municipal officials devoted more revenue to retirement funds, straining budgets and leaving less money available for services.
States have also increased employee contributions, eliminated cost-of-living adjustments and changed age requirements and benefit levels for future employees.
Between 2009 and 2013, 48 states and Puerto Rico enacted pension-financing or benefit changes, said S&P, citing the National Conference of State Legislatures.
Retirement systems in 10 states, including Illinois, Kentucky and Connecticut, had 60 percent or less of what they need to cover promised benefits, according to S&P. Pensions should have a strategy to achieve or maintain 100 percent funding over a reasonable period of time, according to the American Academy of Actuaries.
Weakening Effect
“We do not view pension liabilities as immediately jeopardizing state governments’ capacity to fund their debt- service obligations, but we believe they can weaken a state’s relative credit profile if left unmanaged,” the S&P analysts said in the report.
Detroit may have a deficit of as much as $3.5 billion, in part because of unrealistic assumptions of 8 percent annual investment returns, according to Kevyn Orr, the city’s emergency manager. Pension overseers say the gap is about $700 million.
The failure of elected officials to make annually required pension contributions rather than poor investment returns is the biggest reason for funding gaps, said Wilshire’s Waid.
“When tax revenues are up, they don’t make contributions,” he said. “When tax revenues go down, they don’t have the money.”