Policy Documents

State Pension Funds Fall Off a Cliff

Barry W. Poulson and Arthur P. Hall –
January 1, 2010

The economic downturn has resulted in a sharp decrease in the value of state pension fund assets, causing the funding ratio in many state pension plans to fall significantly.

In some of these plans, unfunded liabilities have nearly doubled over the past year.

Many of these state pension plans assume a rate of return on assets of eight percent or more, far higher than what can reasonably be expected. Because they assume a high rate of return on assets, state pension plans often invest in a portfolio heavily weighted towards equities, which can result in greater volatility in the value of assets, funding ratios, and unfunded liabilities.

Even with a questionably high eight percent assumed rate of return on assets, government employers would have to significantly increase contribution rates to bring the plans into actuarial balance. This would be difficult given the current recession and associated revenue shortfall.