Loop Capital Report Finds State Debt, Deficits Growing

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WASHINGTON - The combination of bonded debt, budget deficits, and unfunded pension obligations increased in 35 of the 50 states as of the end of fiscal 2007, and probably will be even higher this year as economic conditions have worsened and continue to deteriorate, Loop Capital Markets said in a report issued this week.

The report, which the firm releases each year, focuses on states' "economic debt," an umbrella term that it uses to cover states' net bond debt, unfunded pension obligations, and budget deficits, if applicable. This latest report shows that, of the 35 states with increases, 13 states' economic debt rose more than 50% from the previous year.

"In general, it's not looking too good," Ann Kilber, a research assistant and one of three authors of the report, said in an interview. "And it will probably continue to get worse. Next year, we would expect higher economic debt overall."

California and Illinois topped the list with the most economic debt - $99 billion and $72 billion, respectively, at the end of fiscal 2007. New Mexico, New Jersey, Massachusetts, Ohio, Texas, Connecticut, Pennsylvania, and Kentucky rounded out the top 10 list for highest economic debt, according to Loop Capital.

Kentucky joined the top 10 as its economic debt more than doubled to nearly $18 billion from about $8 billion at the end of fiscal 2006, the report said.

"While some states have lowered their economic debt, 70% of the states have added to their economic debt, adding to the concern that some states may not choose to fund their annual required contributions for state pension plans," the report warned.

"State budgets are going to be under more pressure as you move forward in the next year," said Chris Mier, a managing director and co-author of the report. "We're not necessarily making a statement on the degree to which the unfunded accrued liabilities will increase or whether states will keep their obligations to meet the unfunded liability. It's more if you look at the budgetary aspect in isolation, and expect all other things being equal, then we expect that in general, economic debt burdens will increase."

The report focused on state employee, teacher retirement, legislative, military, and judicial pension plans. It noted that while the U.S. Government Accountability Office has said an 80% funding level of pension plans is acceptable, fewer states are at that level than in previous years.

"More and more states are continuing to allow pension liabilities to accrue at a faster rate than they are able to fund," the report said. "Insufficient contributions by governments in the past, the expansion of benefits, and increased pressure on states' revenue sources would again lead us to expect lower funded ratios next year. As the economy continues to weaken it is clear that state governments will be forced to face tough choices ahead to deal with persistent underfunding of their pension plans."

The report looked at 235 pension plans in total, but only 138 had full pension data available. Fifty-eight of those showed they were funding pensions less than 80%.

Those unfunded pension obligations contributed to California's and Illinois' high overall economic debt. Illinois had the highest amount of unfunded pension obligations at about $42.2 billion, but California followed closely behind with about $37.5 billion.

Ohio had $24.5 billion of unfunded pension obligations, followed by Texas with a little more than $19 billion, and Connecticut with $15.3 billion.

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