The Impact of Pension Funding on State Government Finances

Research Report

The Impact of Pension Funding on State Government Finances

August 18, 2003

Abstract

Pension funding issues have an important, but often hidden impact on the finances of state governments. If pension systems are underfunded, governments must address this problem sooner or later through additional contributions to the systems. Capital gains have had a dramatic impact on state tax revenues in the last decade. However, the indirect effects of capital gains on state finances through state pension fund growth and decline have had an even greater, but overlooked effect on the long-term fiscal health of states. The last ten years has seen the rapid growth of state pension asset followed by two years of decline. Changes in pension fund asset/liability relationships have generated problems for states that are much larger than the current state budget shortfalls. Pension funding issues do not have the immediacy of the state budget shortfalls, but they must be considered when states address long term structural imbalance problems.

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