(Bloomberg) — The finances of more than two-thirds of U.S. state pension plans improved in fiscal year 2014, as a soaring stock market boosted returns and many states stopped incorporating losses from the recession into their pension calculations.
The median state pension last year had 70 percent of the assets needed to meet promised benefits, up from 69.2 percent in 2013, according to data compiled by Bloomberg. It was the second straight increase in pension funding. Public pensions had median investment gains of 16.9 percent for the 12 months ended June 30, 2014 according to Wilshire Associates.
“It’s generally agreed that 2014 was mostly a year of improvement for public pension funds,” said Josh Gonze, who co- manages $10.5 billion of municipal bonds at Thornburg Investment Management in Santa Fe, New Mexico. Thornburg’s $7.3 billion Limited Term fund is the 13th largest open-end tax-exempt mutual fund, according to data compiled by Bloomberg.
The Federal Reserve’s policy of keeping short-term interest rates near zero and an improving economy boosted the Standard & Poor’s 500 Index of U.S. stocks by 24.6 percent in the 12 months through June 30, 2014 including dividends, helping to ease the strain on public pensions.
Broad numbers mask big difference in the health of public pensions between states. Eight of 13 states whose funding level declined were states with below average funding levels.
“We have states that seem to be in genuine trouble,” Gonze said, listing Illinois, Kentucky, Alaska and New Jersey. “And clearly states that are not in any trouble at all.”
Illinois, with a pension shortfall of more than $100 billion, remains the state with worst-funded retirement system, with a ratio of assets to liabilities of 39.3 percent, followed by Kentucky at 45 percent and Connecticut at 50.4 percent.
In May, the Illinois Supreme Court struck down a 2013 pension overhaul saying it violated the state constitution’s ban on reducing worker retirement benefits. The ruling highlighted the lack of legal flexibility some states have in addressing their pension funding deficits.
New Jersey’s pensions are projected to run out of assets to pay liabilities between 2021 and 2032, depending on the retirement system, under new accounting rules that most states began implementing in 2014, according to Moody’s Investors Service.