New stress tests are showing how state budgets have never been so exposed to market gyrations. Some pension funds for state workers are so underfunded they face insolvency if the stock market drops.
Most states fund pensions for government workers with a mix of investments and tax dollars. But in recent years, policymakers have relied more and more on market returns. Greg Mennis, a researcher for Pew Charitable Trust, says some states, like Connecticut, have been doing this for a while now.
“They’ve lost so much ground in terms of promising benefits without funding them in decades past that it may be in those states that it consumes 10-15 percent of state revenue for an almost indefinite period of time.”
This means less money for roads and schools—or higher taxes. States most exposed to the stock market are New Jersey, Kentucky, and Colorado. For those states, a recession could bankrupt the pension funds.