U.S. states' unfunded pension costs near $1 trillion in 2013: Pew

SAN FRANCISCO (Reuters) - U.S. states owed $968 billion in unfunded pension benefits for retirees in 2013, the highest level in a decade, according to a report released Tuesday by Pew Charitable Trusts.

The states also reported $587 billion in unfunded retiree health care liabilities and $518 billion in outstanding debt in 2013, according to Pew.

"Although states have decades to pay off these sums - or, in the case of retiree health care, make changes that reduce their liabilities - these claims on future revenue can limit states’ budget flexibility when the costs come due," the report said.

"Less money may be available to fund other priorities, such as health care for low-income Americans or education, or to cover unexpected needs," the report said.

The long-term liabilities can also affect credit ratings and borrowing costs for an individual state.

Unfunded pension obligations increased from 2.5 percent of personal income in 2003 to 6.9 percent in 2013, the report said. The increase was due to underfunding, lower-than-expected investment returns, and, in some cases, expanded but unfinanced benefits, Pew said.

Alaska had by far the most in total unfunded liabilities as measured by personal income. The state reported $8.9 billion in unfunded pension costs and $9.9 billion in unfunded retiree health care costs.

The oil-producing state is currently grappling with a multibillion-dollar budget deficit caused by sustained low crude prices, which led to a series of credit downgrades this year.

After Alaska, Illinois, Mississippi, New Mexico and Kentucky had the largest sums of unfunded pension liabilities.

Hawaii had $13.7 billion in unfunded retiree health care costs, the equivalent of 22 percent of personal income in the state, making it second only to Alaska.

South Dakota, Tennessee and Nebraska had the least amount of unfunded costs.

(Reporting by Rory Carroll; Editing by James Dalgleish)