Looming Public Pension Crisis Is Bigger Than It Appears

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 |  Includes: HYD, HYMB, MLN, TFI
by: Lenny Grover

Summary

Public pension plans are vastly underfunded and imperil state and local budgets over the long-term.

High credit ratings and optimistic actuarial assumptions mask the full extent of the looming crises.

Low yields on long-term municipal bonds reflect hunger for yield and obliviousness to underlying risks.

Summary

With 30-Year muni bonds yielding a paltry 3.39% on average (according to Bloomberg), investors seem to be assuming both that inflation will remain historically low over that holding period and public pension costs will not imperil state and municipal budgets. In fact, the average muni yield of 3.39% was equivalent to the 30-year treasury yield as of 5/23/2014 despite the fact that the federal government has powerful options available to it to avert default (i.e. seigniorage). Even when factoring in munis' favorable tax treatment, the effective 30-year muni-Treasury spread is small.

Famed investor Warren Buffett weighed in on public pensions in his 2013 shareholder letter:

"Local and state financial problems are accelerating, in large part because public entities promised pensions they couldn't afford. Citizens and public officials typically under-appreciated the gigantic financial tapeworm that was born when promises were made that conflicted with a willingness to fund them....During the next decade, you will read a lot of news - bad news - about public pension plans."

While there has been some public discussion about the looming public pension crisis, most of the conversation has been driven either by special interest groups that sought to deny pensioners the benefits they were promised or public sector unions advocating for their members. The reports produced by the state plans, themselves, use an accounting gimmick (overestimating future investment returns) to understate the amount of the unfunded liability. Using data from data.gov and the Boston College Center for Retirement Research, I estimate that there was at least a $1.1+ TRILLION cumulative unfunded liability in state and local plans, for which data is available, as of the 2010 plan year end (usually June 30, 2010). That represents more than half the entire aggregate annual budgets of all fifty US states. Detailed aggregate, state-by-state, and plan-by-plan data is presented at the bottom of the article.

Surprisingly, aggregate 2012 state-level data shows that most states underperformed all of the relevant benchmark indexes for their plan year periods. 2002-2010 plan-level data shows that not a single plan (out of the 120 analyzed) attained its assumed rate of return over that 9 year period; most were short by a large margin. All but one of the plans showed a funding shortfall as of year-end 2010, using my methodology (that does not give funds credit for returns assumptions that have proven to be wildly optimistic), and, in aggregate, plans had only about two-thirds of the assets required to be fully funded.

At a high level, the implication for muni-bond holders is clear. Many of the states with very high levels of unfunded liabilities sport high credit ratings. While most of the state plans' actuarial reports assume a 7.5%-8% future rate of return on investments, the 2012 data shows that most pension plans underperformed both the Barclays US Aggregate Bond Index and major stock indexes over the 2012 fiscal year (July 2011 - June 2012)--and posted nowhere near their assumed rates of return. Estimating the individual plans' annual rate of return between the 2001 fiscal year end and the 2010 fiscal year end (the most recent time period for which the BC data is available for many of the plans) shows that not a single plan (out of 120 for which data was available) achieved its assumed rate of annual return over that period; most underperformed by a considerable margin. While higher market returns in 2011-2013 may have closed some of that gap, the extent to which anticipated returns were overestimated for the 9 year period analyzed is very large.

Individual investors tend to have exposure to municipal bonds by either owning the bonds directly or through a mutual fund. In addition, there are a number of uninsured long-term or high yield muni-bond ETFs:

SPDR Nuveen Barclays Capital Muni Bond (NYSEARCA:TFI)

Market Vectors AMT-Free Long Municipal Index ETF (NYSEARCA:MLN)

SPDR Nuveen S&P High Yield Municipal Bond ETF (NYSEARCA:HYMB)

Market Vectors High-Yield Municipal Bond Index ETF (NYSEARCA:HYD)

However, taking a bearish position on the muni market is a challenging exercise. Long term puts do not seem to be available for any of the above-listed ETFs. While there is a Markit muni CDS (credit-default-swap) index (MCDX), it does not currently present a trading opportunity for most individual investors. Normal short positions (i.e. in the above-listed ETFs) are inherently risky, because of the unlimited downside exposure, and are not really suitable for most individual investors.

Analysis

The 2012 plan year, for most states, runs from July 2011 - June 2012. Over that period, stock and bond indexes posted returns from 3.14% to 7.48%:

Rate of Benchmark returns for June 2011 - June 2012

Closing Price

30-Jun-11

Closing Price

30-Jun-12

% Change

Source

NASDAQ

2,773.52

2,935.05

5.82%

Yahoo Finance

S&P500

1,320.64

1,362.16

3.14%

Google Finance

Dow Jones

12,414.34

12,880.09

3.75%

Google Finance

Barclays US Aggregate Bond Index

7.48%

Barclays

* Barclays index calculated as product of monthly reported (1+RoR) rates of return over the holding period

Click to enlarge

Surprisingly, most of the state pensions underperformed every single one of these indexes and Arkansas, Hawaii, and New Jersey even posted negative returns for the 2012 plan year. Below is the estimated (approximate) 2012 fiscal year annual return for the aggregate of each state's (non-local) plans (as reported by Data.gov), calculated as the value of the investment returns divided by the ending plan balance less the net outflows for the year less the posted returns--and contrasted with the benchmark indexes. The number of plans that underperformed every single one of the indexes is staggering.

Est Rate of

Indexes

State

Return in 2012

Exceeded

Alabama

18.04%

4*

Alaska

1.11%

0

Arizona

1.23%

0

Arkansas

-0.42%

0

California

3.26%

1

Colorado

2.15%

0

Connecticut

3.52%

1

Delaware

4.72%

2

Florida

5.00%

2

Georgia

1.97%

0

Hawaii

-0.18%

0

Idaho

1.55%

0

Illinois

0.83%

0

Indiana

1.02%

0

Iowa

3.48%

1

Kansas

0.96%

0

Kentucky

1.43%

0

Louisiana

0.02%

0

Maine

0.72%

0

Maryland

0.92%

0

Massachusetts

-0.26%

0

Michigan

12.18%

4*

Minnesota

3.09%

0

Mississippi

0.51%

0

Missouri

3.41%

1

Montana

16.35%

4

Nebraska

1.04%

0

Nevada

3.14%

0

New Hampshire

2.29%

0

New Jersey

-1.34%

0

New Mexico

0.35%

0

New York

4.61%

2

North Carolina

7.61%

4

North Dakota

9.13%

4

Ohio

1.30%

0

Oklahoma

1.37%

0

Oregon

1.22%

0

Pennsylvania

2.86%

0

Rhode Island

1.72%

0

South Carolina

0.68%

0

South Dakota

1.81%

0

Tennessee

5.34%

2

Texas

8.11%

4*

Utah

2.65%

0

Vermont

19.53%

4

Virginia

1.76%

0

Washington

1.70%

0

West Virginia

1.61%

0

Wisconsin

1.04%

0

Wyoming

-0.70%

0

Click to enlarge

* Indicates plan has fiscal year that differs from that used to calculate the index

The Boston College data set has annual data points for 126 individual state and local pension plans between 2010 and 2011. However, there are many missing data points for 2011 and a number of artifacts/outliers that appear to be problematic. Removing those from the data set yields 2001-2002 through 2009-2010 performance data for 120 plans. Analyzing this data (estimating the annual rate of return in year X as the investment return for year X divided by the ending market value of investments in year X-1), alongside each plan's assumed rate of return demonstrates that, over that time period, every single one of the plans dramatically overestimated their annual rate of return over the time period in question.

Recent Estimated Returns

Estimated Gross %

Estimated rate of

2010 Annual

Relative to Returns Assumption

Return (2002-2010)

return (2002-2010)

Returns Assumption

Alabama ERS

-3.58%

-0.40%

8.00%

Alabama Teachers

0.13%

0.01%

8.00%

Alaska PERS

-9.55%

-1.11%

8.00%

Alaska Teachers

-5.49%

-0.63%

8.00%

Arizona Public Safety Personnel

-3.67%

-0.42%

8.25%

Arizona SRS

12.05%

1.27%

8.00%

Arkansas PERS

11.11%

1.18%

8.00%

Arkansas Teachers

25.98%

2.60%

8.00%

California PERF

15.57%

1.62%

7.75%

California Teachers

7.45%

0.80%

7.75%

Chicago Teachers

9.64%

1.03%

8.00%

City of Austin ERS

41.27%

3.91%

7.75%

Colorado Municipal

39.85%

3.80%

8.00%

Colorado School

31.68%

3.10%

8.00%

Colorado State

28.22%

2.80%

8.00%

Connecticut SERS

-10.58%

-1.23%

8.25%

Connecticut Teachers

45.74%

4.27%

8.50%

Contra Costa County

28.42%

2.82%

7.75%

DC Police & Fire

21.56%

2.19%

7.00%

DC Teachers

22.07%

2.24%

7.00%

Delaware State Employees

18.48%

1.90%

7.50%

Denver Employees

27.03%

2.69%

8.00%

Denver Schools

31.36%

3.08%

8.00%

Duluth Teachers

-6.36%

-0.73%

8.50%

Fairfax County Schools

19.17%

1.97%

7.50%

Florida RS

11.33%

1.20%

7.75%

Georgia ERS

9.56%

1.02%

7.50%

Georgia Teachers

4.57%

0.50%

7.50%

Hawaii ERS

10.39%

1.10%

8.00%

Houston Firefighters

39.48%

3.77%

8.50%

Idaho PERS

19.07%

1.96%

7.25%

Illinois Municipal

46.38%

4.32%

7.50%

Illinois SERS

5.32%

0.58%

7.75%

Illinois Teachers

16.47%

1.71%

8.50%

Illinois Universities

20.43%

2.09%

7.75%

Indiana PERF

40.51%

3.85%

7.00%

Indiana Teachers

7.97%

0.86%

7.00%

Iowa PERS

23.84%

2.40%

7.50%

Kansas PERS

17.36%

1.79%

8.00%

Kentucky County

9.22%

0.98%

7.75%

Kentucky ERS

10.71%

1.14%

7.75%

Kentucky Teachers

-1.35%

-0.15%

8.00%

LA County ERS

-13.83%

-1.64%

5.00%

Louisiana SERS

20.42%

2.09%

8.25%

Louisiana Teachers

8.22%

0.88%

8.25%

Maine Local

39.03%

3.73%

7.25%

Maine State and Teacher

22.25%

2.26%

7.25%

Maryland PERS

14.08%

1.47%

7.75%

Maryland Teachers

14.89%

1.55%

7.75%

Michigan Municipal

43.92%

4.13%

8.00%

Michigan Public Schools

40.87%

3.88%

8.00%

Minneapolis ERF

19.58%

2.01%

6.00%

Minnesota PERF

-16.47%

-1.98%

8.50%

Minnesota State Employees

42.14%

3.98%

8.50%

Minnesota Teachers

-4.94%

-0.56%

8.50%

Mississippi PERS

3.47%

0.38%

8.00%

Missouri DOT and Highway Patrol

31.10%

3.05%

8.00%

Missouri Local

25.22%

2.53%

7.25%

Missouri PEERS

13.35%

1.40%

8.00%

Missouri State Employees

43.95%

4.13%

8.50%

Missouri Teachers

13.03%

1.37%

8.00%

Montana PERS

-3.96%

-0.45%

7.75%

Montana Teachers

-5.37%

-0.61%

7.75%

Nebraska Schools

16.74%

1.73%

8.00%

Nevada Regular Employees

7.13%

0.77%

8.00%

New Hampshire Retirement System

8.43%

0.90%

7.75%

New Jersey PERS

6.49%

0.70%

8.25%

New Jersey Police & Fire

6.87%

0.74%

8.25%

New Jersey Teachers

6.10%

0.66%

8.25%

New Mexico PERF

5.55%

0.60%

7.75%

New Mexico Teachers

14.77%

1.54%

7.75%

New York City ERS

4.76%

0.52%

8.00%

New York City Teachers

4.50%

0.49%

8.00%

New York State Teachers

10.69%

1.14%

8.00%

North Carolina Local Government

57.96%

5.21%

7.25%

North Carolina Teachers and State Employees

55.07%

5.00%

7.25%

North Dakota PERS

16.95%

1.76%

8.00%

North Dakota Teachers

9.97%

1.06%

8.00%

NY State & Local ERS

23.87%

2.41%

8.00%

NY State & Local Police & Fire

23.98%

2.42%

8.00%

Ohio PERS

26.43%

2.64%

8.00%

Ohio Police & Fire

30.85%

3.03%

8.25%

Ohio School Employees

7.59%

0.82%

8.00%

Ohio Teachers

12.21%

1.29%

8.00%

Oklahoma PERS

18.53%

1.91%

7.50%

Oklahoma Teachers

20.88%

2.13%

8.00%

Oregon PERS

27.69%

2.75%

8.00%

Pennsylvania School Employees

18.23%

1.88%

7.75%

Pennsylvania State ERS

57.45%

5.17%

8.00%

Phoenix ERS

5.95%

0.64%

8.00%

Rhode Island ERS

14.12%

1.48%

7.50%

Rhode Island Municipal

14.14%

1.48%

7.50%

San Diego County

32.88%

3.21%

8.00%

San Francisco City & County

20.41%

2.09%

7.66%

South Carolina Police

4.50%

0.49%

8.00%

South Carolina RS

6.63%

0.72%

8.00%

South Dakota PERS

19.90%

2.04%

7.75%

St. Louis School Employees

34.37%

3.34%

8.00%

St. Paul Teachers

37.72%

3.62%

8.50%

Texas County & District

44.55%

4.18%

8.00%

Texas ERS

8.49%

0.91%

8.00%

Texas LECOS

8.39%

0.90%

8.00%

Texas Municipal

21.60%

2.20%

7.00%

Texas Teachers

18.69%

1.92%

8.00%

University of California

2.86%

0.31%

7.50%

Utah Noncontributory

37.43%

3.60%

7.75%

Vermont State Employees

19.09%

1.96%

6.25%

Vermont Teachers

20.55%

2.10%

6.25%

Virginia Retirement System

24.73%

2.49%

7.00%

Washington LEOFF Plan 1

23.80%

2.40%

8.00%

Washington LEOFF Plan 2

25.03%

2.51%

8.00%

Washington PERS 1

23.17%

2.34%

8.00%

Washington PERS 2/3

24.28%

2.44%

8.00%

Washington School Employees Plan 2/3

24.07%

2.43%

8.00%

Washington Teachers Plan 1

23.33%

2.36%

8.00%

Washington Teachers Plan 2/3

24.19%

2.44%

8.00%

West Virginia PERS

37.88%

3.63%

7.50%

West Virginia Teachers

39.35%

3.76%

7.50%

Wisconsin Retirement System

48.69%

4.51%

7.20%

Wyoming Public Employees

23.12%

2.34%

8.00%

Click to enlarge

* Excludes MA (outlier w/-80%- returns in 2009)

* Excludes TN (missing actuarial data from 2010)

* Excludes plans with missing data

Michigan SERS

Nevada Police Officer and Firefighter

Note that the plans calculate their unfunded liabilities assuming the above (high) rate of returns on their investments and an actuarial methodology called asset smoothing. As a result, they are almost universally arguing that $1 of assets in their plan today actually offsets more than $1 of NPV worth of plan liabilities. To calculate my estimate of their unfunded liabilities, I assume that $1 of assets at their period end market value offsets $1 of NPV of liabilities (no asset smoothing). Below is a plan by plan account of the estimated unfunded liabilities according to my calculations versus each plan's.

Actuarial vs. Market Value of Assets

Actuarial Assets

Market Value of

Actuarial Liabilities

Liabilities Less

% Shortfall

Market Value of Assets vs. Liabilities

2010 ($1000s)

Assets 2010 ($1000s)

2010 ($1000s)

Assets (at Market)

Alabama ERS

$ 9,739,331

$ 8,176,732

$ 14,284,119

$ 6,107,387

42.76%

Alabama Teachers

$ 20,132,779

$ 17,037,673

$ 28,299,523

$ 11,261,850

39.80%

Alaska PERS

$ 6,469,832

$ 5,391,527

$ 10,371,672

$ 4,980,145

48.02%

Alaska Teachers

$ 3,259,868

$ 2,716,557

$ 6,006,981

$ 3,290,424

54.78%

Arizona Public Safety Personnel

$ 5,591,304

$ 4,585,863

$ 8,255,185

$ 3,669,322

44.45%

Arizona SRS

$ 27,572,000

$ 22,146,960

$ 36,073,000

$ 13,926,040

38.61%

Arkansas PERS

$ 5,409,000

$ 4,728,500

$ 7,304,000

$ 2,575,500

35.26%

Arkansas Teachers

$ 10,845,000

$ 9,883,574

$ 14,702,000

$ 4,818,426

32.77%

California PERF

$ 257,070,000

$ 201,616,074

$ 308,343,000

$ 106,726,926

34.61%

California Teachers

$ 140,291,000

$ 129,768,107

$ 196,315,000

$ 66,546,893

33.90%

Chicago Teachers

$ 10,917,417

$ 8,947,470

$ 16,319,744

$ 7,372,273

45.17%

City of Austin ERS

$ 1,711,600

$ 1,711,577

$ 2,460,700

$ 749,123

30.44%

Colorado Municipal

$ 2,926,045

$ 2,883,504

$ 4,005,566

$ 1,122,062

28.01%

Colorado School

$ 20,321,736

$ 19,870,277

$ 31,339,754

$ 11,469,477

36.60%

Colorado State

$ 12,791,946

$ 12,487,105

$ 20,356,176

$ 7,869,071

38.66%

Connecticut SERS

$ 9,349,605

$ 7,791,337

$ 21,054,197

$ 13,262,860

62.99%

Connecticut Teachers

$ 14,430,200

$ 12,284,330

$ 23,495,900

$ 11,211,570

47.72%

Contra Costa County

$ 5,341,822

$ 5,027,157

$ 6,654,037

$ 1,626,880

24.45%

DC Police & Fire

$ 5,137,409

$ 2,925,742

$ 5,137,409

$ 2,211,667

43.05%

DC Teachers

$ 1,671,184

$ 1,317,470

$ 1,671,184

$ 353,714

21.17%

Delaware State Employees

$ 6,808,957

$ 5,909,159

$ 7,096,326

$ 1,187,167

16.73%

Denver Employees

$ 1,942,870

$ 1,725,680

$ 2,284,760

$ 559,080

24.47%

Denver Schools

$ 2,961,720

$ 2,940,926

$ 3,332,814

$ 391,888

11.76%

Duluth Teachers

$ 255,309

$ 192,403

$ 312,650

$ 120,247

38.46%

Fairfax County Schools

$ 1,822,603

$ 1,607,663

$ 2,384,061

$ 776,398

32.57%

Florida RS

$ 120,929,666

$ 107,179,990

$ 139,652,377

$ 32,472,387

23.25%

Georgia ERS

$ 13,046,193

$ 10,956,296

$ 16,295,352

$ 5,339,056

32.76%

Georgia Teachers

$ 54,529,416

$ 45,925,549

$ 63,592,037

$ 17,666,488

27.78%

Hawaii ERS

$ 11,345,600

$ 9,821,633

$ 18,483,700

$ 8,662,067

46.86%

Houston Firefighters

$ 3,116,848

$ 2,721,637

$ 3,337,473

$ 615,836

18.45%

Idaho PERS

$ 9,632,100

$ 9,599,892

$ 12,187,900

$ 2,588,008

21.23%

Illinois Municipal

$ 24,251,137

$ 25,141,889

$ 29,129,228

$ 3,987,339

13.69%

Illinois SERS

$ 10,961,540

$ 9,201,831

$ 29,309,464

$ 20,107,634

68.60%

Illinois Teachers

$ 37,439,092

$ 31,323,784

$ 77,293,198

$ 45,969,414

59.47%

Illinois Universities

$ 13,966,643

$ 12,121,542

$ 30,120,427

$ 17,998,885

59.76%

Indiana PERF

$ 12,357,199

$ 10,581,319

$ 14,506,052

$ 3,924,733

27.06%

Indiana Teachers

$ 8,804,964

$ 8,140,769

$ 19,896,625

$ 11,755,856

59.08%

Iowa PERS

$ 21,537,459

$ 19,878,080

$ 26,468,420

$ 6,590,340

24.90%

Kansas PERS

$ 13,589,658

$ 11,352,784

$ 21,853,783

$ 10,500,999

48.05%

Kentucky County

$ 7,296,322

$ 6,327,382

$ 11,131,174

$ 4,803,792

43.16%

Kentucky ERS

$ 4,712,945

$ 3,948,108

$ 11,692,945

$ 7,744,837

66.24%

Kentucky Teachers

$ 14,851,330

$ 12,456,619

$ 24,344,316

$ 11,887,697

48.83%

LA County ERS

$ 38,839,392

$ 33,433,888

$ 46,646,838

$ 13,212,950

28.33%

Louisiana SERS

$ 8,512,403

$ 8,064,543

$ 14,764,015

$ 6,699,472

45.38%

Louisiana Teachers

$ 12,868,484

$ 12,021,431

$ 23,674,842

$ 11,653,411

49.22%

Maine Local

$ 2,045,337

$ 1,781,153

$ 2,122,833

$ 341,680

16.10%

Maine State and Teacher

$ 8,369,763

$ 7,288,320

$ 12,676,367

$ 5,388,047

42.50%

Maryland PERS

$ 11,937,944

$ 10,983,303

$ 19,009,788

$ 8,026,485

42.22%

Maryland Teachers

$ 20,908,150

$ 19,256,510

$ 31,963,421

$ 12,706,911

39.75%

Michigan Municipal

$ 6,945,423

$ 5,973,039

$ 9,317,222

$ 3,344,183

35.89%

Michigan Public Schools

$ 43,294,000

$ 35,855,478

$ 60,927,000

$ 25,071,522

41.15%

Minneapolis ERF

$ 844,033

$ 844,033

$ 1,286,151

$ 442,118

34.38%

Minnesota PERF

$ 13,126,993

$ 11,338,582

$ 17,180,956

$ 5,842,374

34.00%

Minnesota State Employees

$ 8,960,391

$ 7,692,531

$ 10,264,071

$ 2,571,540

25.05%

Minnesota Teachers

$ 17,323,146

$ 14,939,540

$ 22,081,634

$ 7,142,094

32.34%

Mississippi PERS

$ 20,143,426

$ 16,788,214

$ 31,399,988

$ 14,611,774

46.53%

Missouri DOT and Highway Patrol

$ 1,375,845

$ 1,312,717

$ 3,258,867

$ 1,946,150

59.72%

Missouri Local

$ 3,592,226

$ 3,695,341

$ 4,432,332

$ 736,991

16.63%

Missouri PEERS

$ 2,892,411

$ 2,404,425

$ 3,658,713

$ 1,254,288

34.28%

Missouri State Employees

$ 7,923,377

$ 6,727,623

$ 9,853,155

$ 3,125,532

31.72%

Missouri Teachers

$ 28,931,331

$ 23,755,741

$ 37,233,602

$ 13,477,861

36.20%

Montana PERS

$ 3,889,890

$ 3,315,906

$ 5,241,819

$ 1,925,913

36.74%

Montana Teachers

$ 2,956,583

$ 2,521,446

$ 4,518,168

$ 1,996,722

44.19%

Nebraska Schools

$ 7,040,909

$ 5,940,537

$ 8,542,119

$ 2,601,582

30.46%

Nevada Regular Employees

$ 19,665,764

$ 16,604,769

$ 27,616,270

$ 11,011,501

39.87%

New Hampshire Retirement System

$ 5,233,838

$ 4,847,852

$ 8,953,932

$ 4,106,080

45.86%

New Jersey PERS

$ 28,734,593

$ 24,332,712

$ 41,347,836

$ 17,015,124

41.15%

New Jersey Police & Fire

$ 22,558,521

$ 19,844,138

$ 29,274,359

$ 9,430,222

32.21%

New Jersey Teachers

$ 33,265,327

$ 25,892,496

$ 49,543,348

$ 23,650,852

47.74%

New Mexico PERF

$ 12,243,713

$ 10,016,491

$ 15,601,461

$ 5,584,970

35.80%

New Mexico Teachers

$ 9,431,300

$ 8,232,523

$ 14,353,500

$ 6,120,977

42.64%

New York City ERS

$ 42,556,400

$ 35,383,794

$ 42,556,400

$ 7,172,606

16.85%

New York City Teachers

$ 31,135,400

$ 26,398,410

$ 31,135,400

$ 4,736,990

15.21%

New York State Teachers

$ 105,302,082

$ 76,844,937

$ 105,302,082

$ 28,457,145

27.02%

North Carolina Local Government

$ 18,570,514

$ 15,795,385

$ 18,646,430

$ 2,851,045

15.29%

North Carolina Teachers and State Employees

$ 57,102,198

$ 48,773,836

$ 59,876,066

$ 11,102,230

18.54%

North Dakota PERS

$ 1,621,723

$ 1,474,185

$ 2,208,386

$ 734,201

33.25%

North Dakota Teachers

$ 1,841,960

$ 1,437,950

$ 2,637,165

$ 1,199,215

45.47%

NY State & Local ERS

$ 158,159,164

$ 114,057,641

$ 158,159,164

$ 44,101,523

27.88%

NY State & Local Police & Fire

$ 28,605,772

$ 20,194,091

$ 28,605,772

$ 8,411,681

29.41%

Ohio PERS

$ 60,599,000

$ 63,515,006

$ 79,630,000

$ 16,114,994

20.24%

Ohio Police & Fire

$ 10,681,012

$ 10,075,500

$ 15,384,437

$ 5,308,937

34.51%

Ohio School Employees

$ 10,787,000

$ 8,953,363

$ 14,855,000

$ 5,901,637

39.73%

Ohio Teachers

$ 55,946,259

$ 54,140,413

$ 94,720,669

$ 40,580,256

42.84%

Oklahoma PERS

$ 6,348,416

$ 5,774,379

$ 9,622,628

$ 3,848,249

39.99%

Oklahoma Teachers

$ 9,566,700

$ 8,351,966

$ 19,980,600

$ 11,628,634

58.20%

Oregon PERS

$ 51,583,600

$ 47,685,015

$ 59,329,500

$ 11,644,485

19.63%

Pennsylvania School Employees

$ 59,306,848

$ 45,598,475

$ 79,005,428

$ 33,406,953

42.28%

Pennsylvania State ERS

$ 29,443,945

$ 25,886,102

$ 39,179,594

$ 13,293,492

33.93%

Phoenix ERS

$ 1,868,093

$ 1,535,174

$ 2,697,288

$ 1,162,114

43.08%

Rhode Island ERS

$ 6,405,209

$ 5,487,924

$ 13,238,855

$ 7,750,931

58.55%

Rhode Island Municipal

$ 1,196,385

$ 1,000,481

$ 1,626,621

$ 626,140

38.49%

San Diego County

$ 8,433,310

$ 6,868,944

$ 9,999,161

$ 3,130,217

31.30%

San Francisco City & County

$ 16,069,058

$ 13,136,786

$ 17,643,394

$ 4,506,608

25.54%

South Carolina Police

$ 3,612,700

$ 2,851,474

$ 4,850,457

$ 1,998,983

41.21%

South Carolina RS

$ 25,400,331

$ 19,681,137

$ 38,774,029

$ 19,092,892

49.24%

South Dakota PERS

$ 7,119,875

$ 6,496,635

$ 7,393,251

$ 896,616

12.13%

St. Louis School Employees

$ 944,357

$ 937,594

$ 1,066,271

$ 128,677

12.07%

St. Paul Teachers

$ 1,001,444

$ 815,307

$ 1,471,630

$ 656,323

44.60%

Texas County & District

$ 17,808,600

$ 17,729,760

$ 19,931,200

$ 2,201,440

11.05%

Texas ERS

$ 23,628,567

$ 19,580,610

$ 27,668,876

$ 8,088,266

29.23%

Texas LECOS

$ 802,897

$ 668,353

$ 930,747

$ 262,394

28.19%

Texas Municipal

$ 16,986,000

$ 17,992,494

$ 20,481,500

$ 2,489,006

12.15%

Texas Teachers

$ 111,293,000

$ 95,688,405

$ 134,191,000

$ 38,502,595

28.69%

University of California

$ 41,195,318

$ 34,574,454

$ 47,504,309

$ 12,929,855

27.22%

Utah Noncontributory

$ 16,895,039

$ 15,802,205

$ 20,544,827

$ 4,742,622

23.08%

Vermont State Employees

$ 1,265,404

$ 1,169,845

$ 1,559,324

$ 389,479

24.98%

Vermont Teachers

$ 1,410,368

$ 1,305,250

$ 2,122,191

$ 816,941

38.50%

Virginia Retirement System

$ 52,729,000

$ 44,645,816

$ 72,801,000

$ 28,155,184

38.67%

Washington LEOFF Plan 1

$ 5,560,900

$ 4,586,358

$ 4,393,300

$ (193,058)

-4.39%

Washington LEOFF Plan 2

$ 7,927,000

$ 5,081,657

$ 7,927,000

$ 2,845,343

35.89%

Washington PERS 1

$ 9,293,000

$ 7,626,486

$ 12,538,100

$ 4,911,614

39.17%

Washington PERS 2/3

$ 25,978,000

$ 16,368,663

$ 25,978,000

$ 9,609,337

36.99%

Washington School Employees Plan 2/3

$ 3,459,000

$ 2,237,385

$ 3,459,000

$ 1,221,615

35.32%

Washington Teachers Plan 1

$ 7,791,300

$ 6,404,061

$ 9,201,300

$ 2,797,239

30.40%

Washington Teachers Plan 2/3

$ 9,106,000

$ 5,547,281

$ 9,106,000

$ 3,558,719

39.08%

West Virginia PERS

$ 3,974,609

$ 3,866,588

$ 5,325,830

$ 1,459,242

27.40%

West Virginia Teachers

$ 4,143,540

$ 4,143,540

$ 8,904,312

$ 4,760,772

53.47%

Wisconsin Retirement System

$ 80,626,900

$ 75,872,072

$ 80,758,800

$ 4,886,728

6.05%

Wyoming Public Employees

$ 5,799,531

$ 5,495,337

$ 6,855,643

$ 1,360,306

19.84%

Total

$2,629,875,887

$ 2,231,596,280

$ 3,375,676,773

$ 1,144,080,493

33.89%

Overstatement of

Assets

$ 398,279,607

Estimated Unfunded Obligations

$ 1,144,080,493

Click to enlarge

In total, my calculations show over a $1.1 trillion unfunded liability in the 120 state and local plans excluding any unfunded liabilities in additional local plans within each state for which data is unavailable (the plans excluded from the plan-level analysis: MA, TN, etc. would increase this aggregate shortfall if included). While investment returns are likely to be higher in the 2012-2014 fiscal years, closing some of this gap, it would be imprudent to assume that the strong performance of the underlying investment indexes continues at that elevated rate.

Policymakers at the state and local levels will be forced to make difficult trade-offs in the years ahead. $1.1 trillion is more than half of the aggregate total state budgets for the most recent fiscal years for which data is available (5/25/2014). It is a very big number, and no amount of unreasonable assumptions or whitewashing will make it go away on its own. Retirees, future retirees, taxpayers, and municipal bond holders all deserve better than the uncertain future presented by the status quo. The political cost of taking action is high but the ultimate financial cost of inaction will be far higher.

If you are holding muni bonds (either directly or indirectly) in your search for yield, you should consider the specific risks of the state or municipality, and its unfunded obligations, in the context of your investment.

NOTE: The full excel workbook containing the raw data, and my calculations, is available upon request. If you make use of any of the data in this article, please cite the following sources:

1) Lenny Grover's article on Seeking Alpha

2) Data.gov

3) Boston College Center for Retirement Research

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.