P&I is reporting on information recently released by Moody’s regarding the funded status for the 50 U.S. states as of fiscal year 2017.  According to Moody’s analysis, the adjusted net pension liabilities grew substantially from 2016 and now stands at $1.6 trillion up from $1.3 trillion in 2016. This analysis was done following a difficult performance year in 2016 in which the state plans produced an average 0.54% return.

The analysis is clearly dated, and the net pension liability will have likely decreased if performance is the only factor influencing this calculation, as fiscal years 2017 (12.4%) and 2018 (8.2%) have been much better for these public plans.

However, the article doesn’t mention what discount rate is used to determine the liability. I suspect that each plan’s return on asset assumption (ROA) is being used, which masks the true value of the liability. Furthermore, as long interest rates have been rising, the actual improvement in the net pension liability may be greater than what is presently being forecast.

Clearly, state plans such as Illinois, New Jersey, Kentucky, Connecticut, and others have funding issues, but if a true mark-to-market analysis were done on the state plans we might finally begin to understand the true cost. Furthermore, with the use of an appropriate discount rate, changes in interest rates would be captured in the calculation for total liabilities. In a rising interest rate environment, liability growth will likely be negative. It doesn’t take an outsized return in such an environment to meaningfully improve plan funding.

The lack of true transparency regarding plan liabilities is impacting critical decisions regarding investment structure, asset allocation, contribution rates, and benefit conversations.