subject: State Pensions And The Death Spiral [print this page] State pensions in New Jersey, Kansas, and Illinois, among a number of other areas, are in what industry experts call a "death spiral." This term means that the inadequacy of local government assets won't permit these states to cover pension payouts (which take up an increasing percentage of overall resources), costs that rise at double the rate of investment gains, and general pension benefits.
Less than 25 of the 50 local retirement systems had enough to cover 80% of all expected benefits in the 2009 fiscal year, based on the information compiled in Bloomberg Link's Cities and Debt Briefing. In 2007, only 19 states didn't have ample funds. Illinois barely had enough to pay for around 50% of all benefits in the state in 2009, which is the lowest funded ratio. Actuaries say that the figure shouldn't go below 80%.
Benefits from the funds of a minimum of 14 states were more than 10% of assets for the fiscal year, says the briefing, while none went beyond the threshold in 2007. The growing budgetary deficit resulted in slashed benefits for numerous government workers and teachers in Michigan, Minnesota, Colorado, and other areas as states worked to alleviate financial strain. The deficit also reduced the likelihood of the return of the country's pension system to financial stability as fund managers were forced to leave money in low-return, short-term investments to make enough for the payment of pension benefits.
Michael Aronstein, Oscar Gruss & Son manager, says the dynamic is what is known as a "death spiral," for which no return or financial solution seems possible. In the briefing, Richard Ciccarone of McDonnel Invesment Management pinpointed the source of the problem: the outdated design of the current pension system. He adds that the outmoded system results in the government's inability to pay pension benefits if the economy slows down.
