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An American Tale: More Growing Deficits, This Time It’s Our State Pensions

While a great debate rages in states across the country about benefits and pensions for state workers, existing pensions continue to fall short of their funding needs. State pension deficits increased 26% to $1.26 trillion in 2009, according to the Pew Center.

Here are some other eye-opening stats from the same report:

  • State retirement systems had 78% of what they needed to pay for promised pensions
  • Pension plans lost an average of 19% in 2009
  • The unfunded liability in state-run pension plans rose to $660 billion in 2009 from $452 billion in 2008
  • The biggest unfunded pension liabilities in 2009 were in Illinois, which had just 51% gap and West Virginia, with 56%. New Hampshire was 58% funded, while New Jersey and Ohio both had just two-thirds of what they needed.

The stock market's recovery in 2010 and 2011 (so far) likely helped the situation, but that may have been offset by rising health care costs and underfunding of pensions. The poor fiscal situation of states highlights the destructive force that was the financial crisis of 2008-09. The question is where do they go from here? Whether the market continues to recover or not, states continue to cut back on benefits while at the same time underfunding their pensions systems. This situation will likely lead to more standoffs like the one Wisconsin experienced. It'll also be something for the market to keep an eye on. As Meredith Whitney has so boldly claimed, the budget shortfalls states are facing could lead to a rash of municipal bond defaults.

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