(Bloomberg) U.S. state pensions such as Illinois, Kansas and New Jersey are in a "death spiral," with assets at many insufficient to cover benefits, payouts consuming a growing portion of resources and costs rising twice as fast as investment gains.

Less than half the 50 state retirement systems had assets to pay for 80% of promised benefits in their 2009 fiscal years, according to data compiled for the Bloomberg Cities and Debt Briefing in New York today. Two years earlier, only 19 missed the mark. Illinois covered just 50.6% of benefits last year, the lowest so-called funded ratio, which actuaries say shouldn't be less than 80%.

Benefits paid by funds in at least 14 states equaled more than 10% of assets in the fiscal year, the figures show. In 2007, none exceeded the threshold. The growing burden prompted Colorado, Minnesota, Michigan and other states to trim benefits for millions of teachers and government workers. It also forced fund managers to keep money in short-term low-return investments to pay benefits, reducing chances pensions can earn their way back to financial health.

"Once you get into that dynamic, you're in a death spiral," said Michael Aronstein, who manages the $295 million Marketfield Fund of stocks as chief investment strategist at Oscar Gruss & Son, a New York brokerage. "There's no financial or return solution."

The largest Illinois pension, the $33 billion Illinois Teachers' Retirement System, paid $3.7 billion of benefits in the year ended June 30, 2009. That's 13% of its assets at the time, up from 8% two years earlier, according to annual reports and Dave Urbanek, its spokesman. The New York State system, the best-funded in the Bloomberg data at 107.4%, paid out 7% of its assets in fiscal 2009.

Shoring Up The System

At June 30, 2010, after the Illinois fund's investments had gained 13% and lawmakers borrowed $3.5 billion to shore up the system, benefits in the fiscal year had risen to $3.9 billion, according to Urbanek, or 12% of assets.

Lawmakers in Illinois, which, with California, has the lowest credit rating from Moody's Investors Service of any state, were unwilling to approve another bond sale, for $3.7 billion, this fiscal year. As a result, the pension may sell $3 billion of assets to cover benefits, Urbanek said.

"Death spiral is too harsh a language," he said. "It's a concern, but we're not on life-support."

Selling assets, reducing services and cutting costs such as pension contributions are tactics states are using to confront what a June 29 report by the Center on Budget and Policy Priorities, a Washington-based research group, said was a record $140 billion combined budget deficit this fiscal year.

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