States Borrow to Cover Pension Fund Shortfalls

Debt-burdened U.S. states and municipalities were grappling with about $900 billion in long-term unfunded pension liabilities as of 2011, according to a Boston College analysis of 126 plans. The solution for some local governments from California to Florida: Take on more debt.

State financial authorities are betting the pension assets they now manage will get better returns as the U.S. economy recovers and stock and bond markets improve. If so, states can take advantage of today’s ultralow borrowing costs to strengthen their retirement plans now—and pay off the debt later when pension funds generate returns robust enough to more than cover their annual payouts. Local governments sold $4.96 billion of pension bonds in 2011, the most since 2008, according to data compiled by Bloomberg. In California, Pasadena issued pension bonds in March. Oakland, Calif., and Fort Lauderdale are among issuers considering a bond sale later this year. Illinois, which has one of the country’s most poorly funded public pension funds, borrowed a total of $7.2 billion in 2010 and 2011.