Report: Only One US State Pension has Funded Level Above 50%

A recent report from the American Legislative Exchange Council (ALEC), said that, based on its calculations, every US state’s pension system has a funded level below 50%, except for that of Wisconsin, which has a funded level of 61.5%.

According to the report from the nonprofit organization of fiscally conservative state legislators, the highest-funded states after Wisconsin are South Dakota (48.1%), New York (46.3%), Tennessee (45.9%), and North Carolina (45.0%). Meanwhile, the five lowest-funded states are Connecticut (19.7%), Kentucky (20.9%), Illinois (23.3%), Mississippi (24.2%), and New Jersey (25.7%).

“Absent significant reforms, unfunded liabilities of state-administered pension plans will continue to grow and threaten the financial security of state retirees and taxpayers alike,” said the report. “The fiscal calamity could be far deeper and prolonged than the Great Recession.”

ALEC’s Center for State Fiscal Reform analyzed the official annual financial documents of more than 280 state-administered pension plans using what it deems “more realistic investment return assumptions” in order to gain a clearer picture of the pension problem.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

The unfunded liabilities of each pension plan were revalued using a discount rate equal to a risk-free rate of return represented by debt instruments issued by the US government. It said that 2017’s study used a risk-free rate of 2.142%, derived from an average of the 10- and 20-year US Treasury bond yields from April 2016 to March 2017.

“Based on these revised investment return assumptions, we report on total unfunded pension liability, unfunded pension liabilities per capita, and the funding ratio of these plans,” said ALEC.

The report said that unfunded liabilities of public pension plans continue to loom over state governments, and that if pension assets were determined using “more realistic investment return assumptions,” pension funding gaps would be even larger than what is being reported in state financial documents.

ALEC said that unfunded liabilities, using a risk-free rate of return assumption of state-administered pension plans, now exceed $6 trillion—an increase of $433 billion from last year.

“The national average funding ratio is a mere 33.7%, amounting to $18,676 of unfunded liabilities for every resident of the United States,” said the report. “Much of this problem is due to state governments failing to make their annually required contributions.”

The report cited a 2017 Pew Charitable Trusts report that found that only 32 states in fiscal year 2015 made pension fund contributions sufficient enough to diminish accrued unfunded liabilities.

“Taxpayers ultimately provide the wages for public sector employees and the financial resources to cover the promised benefits of traditional pension plans,” said the report. “And all residents are impacted when pension costs absorb limited government resources, rather than core government services such as education, public safety, and roads.”

Faulty accounting and reporting methods obscure the magnitude of unfunded liabilities, according to the report. It said that significant changes made by the Governmental Accounting Standards Board (GASB) in 2012 to the methods used for measuring a pension plan’s financial health were intended to increase transparency, consistency, and comparability of pension information.

“Unfortunately,” said the report, “states have found ways to work around these requirements and paint an unrealistically rosy picture of their pension funding status.”

Tags: American Legislative Exchange Council, Funded Status, Pension, US

The $344 billion California Public Employees’ Retirement System (CalPERS) has scoffed at a report from the American Council for Capital Formation (ACCF) that is highly critical of the systems’ environment, social, and governance (ESG) investments.

The report laid much of the blame for CalPERS $138 billion in unfunded liabilities on “the tendency on the part of CalPERS management to make investment decisions based on political, social, and environmental causes rather than factors that boost returns and maximize fund performance.”

The ACCF said four of the nine worst-performing funds in the CalPERS portfolio as of March 31, focused on supporting ESG ventures, and that none of the system’s 25 top-performing funds was ESG-focused.

“CalPERS has demonstrated a troubling pattern of investments in social and political causes that are truly jeopardizing the retirement fund,” said Tim Doyle, ACCF’s vice president for policy and general counsel, in a statement. “Rather than focusing on getting the fund back on firm financial footing, CalPERS’s management is making questionable investments of pensioners’ money into social and political causes that are not yielding acceptable returns.”

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

However, CalPERS shot back at the accusations, saying that the CalPERS Investment Office’s investment decisions are based on its fiduciary responsibility to sustain the fund and pay the benefits public employees have earned.

“We work to achieve the best risk-adjusted returns possible. Incorporating environmental, social, and governance principles is an important part of our decision-making in our investment office,” said CalPERS spokesman Joe DeAnda in an email to CIO. “We have successfully pushed companies to publicly report on the impact that climate change is having on their business, and we have successfully pushed them to open up their board selection process because companies with a diverse group of talented people on their boards perform better financially.”

Backing up CalPERS is a report from Morningstar that said “academic and industry studies are demonstrating that sustainable investing does not underperform conventional investing, and there is mounting evidence that incorporating environmental, social, and governance factors can have a positive impact on performance.”

The report cited Oxford University researchers who analyzed nearly 200 studies, reports, and articles on sustainability, and found that 90% of the studies on the cost of capital show that sound sustainability standards lower the cost of capital of companies. It also said that 88% of the research shows that solid ESG practices result in better operational performance of firms, and that 80% of the studies show that stock price performance of companies is positively influenced by good sustainability practices.

Additionally, research from State Street Global Advisors shows that higher-scoring ESG companies in emerging markets, and within small caps, have outperformed lower-scoring ones in their respective categories. It said that “a thoughtful ESG evaluation process” should be able to find attractive investment opportunities across the capitalization range and within different regions.

“We stand behind our efforts,” said DeAnda. “Any suggestion that we stop engaging with companies on behalf of our members is laughable.”

Tags: ACCF, CalPERS, ESG, Pension