We've been reporting on this coming crisis for years here at AT and now it looks like it's about to hit; states are short $1.26 trillion in unfunded liabilities and worse, the gap is growing as is the number of states affected.

Reuters:

States are short $1.26 trillion in paying for public employee pensions and other retirement benefits, a gap that grew 26 percent in one year and will take many more years to wipe out, according to a report released on Tuesday.

A total of 31 states had pensions that were underfunded in fiscal 2009, the latest year for which data is available, up from 22 states a year earlier, the Pew Center on the States reported.

The financial crisis in 2008 crushed many pension funds' investments, just as historic budget woes forced governments to cut contributions to those funds.

The combination "made a serious problem even worse," said Susan Urahn, the Pew Center's managing director.

In fiscal 2009, which for most states began in July 2008, states were short $660 billion for future pension payments and $604 billion for other retiree benefits, namely healthcare.

Growing unfunded pension liabilities on top of still daunting state budget gaps are a top concern of Wall Street rating agencies and investors in the $2.9 trillion municipal bond market. Most states are legally bound to pay retirees benefits, and they must make up for any investment loss from their already depleted treasuries or by borrowing.

Pensions are deemed "underfunded" when they are unable to pay at least 80 percent of liabilities.

Preliminary data for fiscal 2010 shows that pension funding levels of 10 states deteriorated further, while just three registered increases, Pew found.

We simply can't raise taxes enough to cover the shortfalls. Michael Barone:

Many on the political left decry the disappearance of defined benefit pension plans from the private sector and strive mightily to maintain them for public-sector employees. They argue that people with defined contribution plans often don't save enough for a comfortable retirement or make bad investment choices.

They argue that defined benefit plans and defined benefit public policies provide you with absolute 100 percent security and eliminate all risk. Unfortunately, it's becoming clear they don't.

The people who put defined benefit plans and policies in place assumed there always would be someone able to pay for them.

There always would be enough new workers to pay for retirees' Social Security and Medicare. Benefits were raised on the assumption that the baby boom generation would produce a baby boom of its own. Oops. Birth rates near replacement levels, which we have now, are not enough. The ratio of workers to retirees is in inexorable decline.

The problem is that in order to move into a defined contribution plan, state laws like those in Wisconsin would have to be changed. Plus, you couldn't move workers nearing retirement into the more sensible defined contribution plans because of fairness.

So it seems certain that the defined benefit plans will be with us for the foreseeable future - if they don't bankrupt us first, as they very well might.