Pension Orgs Aim to Set the Record Straight on Public Schemes

(February 3, 2011) — A group of organizations representing state and local governments and public pensions has released a fact sheet to clarify the operations and funding of public employee pensions.

The document comes after mounting attention to force greater disclosure among state and local pensions. The US Securities and Exchange Commission (SEC) launched an investigation late last month into public statements by Illinois officials regarding the state’s massively underfunded pension fund — known as the worst-funded pension system among US states. And more recently, the Municipal Securities Rulemaking Board (MSRB), which oversees the US municipal bond market, has begun investigating greater disclosure of massive state and local government pension liabilities to better guard investors.

According to the fact sheet released February 1, public pension plans are, in contrast to popular consensus, not in crisis. “Most state and local government employee retirement systems have substantial assets to weather the economic crisis; those that are underfunded are taking steps to strengthen funding,” the report noted. “It is important to understand that pensions are funded and paid out over decades,” the fact sheet continued, asserting that there is currently $2.7 trillion already set aside in pension trusts for current and future retirees.

Furthermore, according to the document, retirement systems remain a small portion of state and local government budgets. The portion of state and local government spending dedicated to retirement system contributions is about 3%, the document said. “While some pension trusts are fully funded (they have enough assets in the trust now for all pension obligations), following the recent market decline, plans will need to increase their contribution levels to five percent on average to return to full funding.”

The fact sheet — issued by 10 organizations, including the National Association of State Retirement Administrators, National Council on Teacher Retirement and National Conference of State Legislatures — also stated that long-term investment returns of public funds continue to exceed expectations. “Since 1985 – a period that has included three economic recessions and four years of negative median public fund investment returns – actual public pension investment returns have exceeded assumptions. For the 25-year period ended 12/31/09, the median public pension investment return was 9.25%. Moreover, for the year ended 6/30/10, this return was12.8%. These actual returns exceed the 8% average public pension investment assumption, as well as the average assumed rate of return used by the largest corporate pension plans.”