S&P Report Says U.S. States' Budgets Are Strained Due to Rising Unfunded Pension Liabilities

NEW YORK, Feb. 23 /PRNewswire/ -- U.S. state budgetary stress is rising due to increasing pension fund contribution demands at a time when costs are also escalating in other areas, such as education and Medicaid, according to a report released today by Standard & Poor's Ratings Services titled, "Rising U.S. State Unfunded Pension Liabilities Are Causing Budgetary Stress."

One measure of the health of a pension fund is the funded ratio, which for state pension funds has fallen dramatically since 2000.

"If pension investment return assumptions are met over the near-term, funded ratios may begin to stabilize or improve in fiscal 2006 and beyond," said Standard & Poor's credit analyst Parry Young. "The risks to such a scenario, in addition to the potential for investment return shortfalls, include a number of factors that affect funding, such as changes in actuarial assumptions, benefit levels and demographics," he added. The funded ratio is the actuarial value of assets (AVA) divided by actuarial accrued liabilities (AAL).

In looking at prospective public pension funding levels from the standpoint of one key variable, investment return performance, recent investment results would suggest that the climate could improve.

"With public pension funds on average exceeding their investment return assumptions for both fiscals 2004 and 2005, we should be looking at market value increases for pension assets," Mr. Young said. "However, on an actuarial basis, public funds will probably continue to experience modest declines in both assets and funding ratios for fiscal 2005," he added.

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