US Net Pension Liabilities Top $1 Trillion

Ratio of liabilities to personal income rises to 3.6%, according to Fitch Ratings.

A “lackluster performance” by pension assets, combined with increases in the present value of future benefits, has pushed net pension liabilities beyond $1 trillion in fiscal 2017, from $892 billion the previous year, according to a report from Fitch Ratings.

The report also identified seven states with “long-term liability burdens” that are more than 20% of personal income, led by Illinois, which had liabilities that are 29% of personal income. Another eight states carry what Fitch considers moderate long-term liability burdens that are between 10% and 20% of personal income. On the opposite end of the spectrum Nebraska had the lowest liability burden at 1.5% of personal income.

“States like Illinois, Kentucky, and New Jersey are feeling the effect of insufficient contributions in the form of severely underfunded pensions and rising budgetary demands for pension contributions,” Douglas Offerman, a senior director at Fitch Ratings, said in a release.

Fitch said the ratio of net pension liabilities to personal income rose to 3.6% for the entire US in fiscal 2017.

According to the report, discount rate changes are also having a noticeable effect on state pensions, with 80 state-reported plans lowering their discount rates from the previous year.

“Many of the net pension liabilities that states have comprise pension obligations for non-state employees,” said Offerman, “usually local teachers, legally carried and directly funded by the state.”

Fitch said it recalculates state-reported pension liabilities based on a 6% discount rate for plans using a higher discount rate, adding that the pension liability burden of individual states, combined with bonded debt, varies widely.

The report also found that despite rising net pension liabilities, the median level of tax-supported debt relative to personal income remained virtually unchanged at 2.3% of personal income for fiscal 2017.

“States in general remain selective debt issuers and tend to do so primarily as capital needs arise,” said Offerman. “As a result, most states will continue to see only gradual shifts in their debt burdens from year to year.”