Despite healthy gains from the ongoing stock market rally, public pension funds are still badly underfunded and the shortfall continues to widen.
To try to close the gap, many states have shifted pension fund assets into stocks and alternative investments like hedge funds. But in doing so, they face a greater risk of being able to meet their long-term promises to pay retiree benefits, according to a new report from the Pew Charitable Trusts.
In the short run, the heavy investment in riskier assets has been paying off. After big losses during the financial collapse in 2008, large funds posted annual returns of more than 12 percent for the fiscal year ended last June, according to the report.
But the gains haven't come close to making up for years of underfunding by states that simply failed to set aside what their pension accountants told them they'd need to keep their retirement promises to state workers. As of 2012, the latest data available, states had set aside only $3 trillion to meet the more than $4 trillion in benefits earned by public workers.
"It is function of bad policies and bad budget practices," said Gregory Mennis, head of the Public Sector Retirement Systems Project at Pew. "There are states where the funding policies are reasonably sound—New Jersey is a perfect example—but the state simple simply chooses not to make the payments that their own policy recommends making."
In New Jersey, Republican Gov. Chris Christie, a potential 2016 GOP presidential candidate, recently announced a plan to divert $2.4 billion in pension payments to close a $2.7 billion budget gap. In 2012, the state came up with just 39 percent of the annual contribution required to meet its estimated $47 billion pension liability.
New Jersey isn't alone. About half the states kicked in at least 90 percent of their annual required contributions in 2012, the latest data available.
As a result, most states have set aside far less than they'll need to keep their promises to current and future public retirees. Only Wisconsin has fully funded its pension plans.
Some 14 states have saved at least 80 cents for every dollar they'll need to cover their pension liability. Illinois has set aside only 40 percent of what it owes; Kentucky (47 percent), Connecticut (49 percent), Alaska (55 percent), Kansas (56 percent), Louisiana (56 percent), and New Hampshire (56 percent) have the worst-funded public employee pension plans.