US Census Bureau: While Still Lagging Below Pre-Crisis Peaks, Public Pensions Continue Their Recovery

(April 1, 2011) — New government data shows that even though US public pension funds’ investments increased in value in the fourth quarter of 2010, funding levels are still below their pre-crisis peaks.

The US Census Bureau said that for the 100 largest state and local retirement systems in the country, total investment rose 5.5% in the final quarter of 2010, spurred by boosts in stocks, corporate bonds, and international securities. The Bureau reported that the funds’ total holdings and investments increased $138 billion to $2.64 trillion in the last three months of the year, reaching the highest level since the second quarter of 2008 and slightly reducing pressure on states and localities.

Meanwhile, Standard & Poor’s has released a separate report in its annual survey of state pension funds indicating that the funding ratios for pension funds in states continue to decline even with improved returns. The report, titled “U.S. States’ Pension Funded Ratios Drift Downward,” indicates that state public pension plans had a mean funding ratio of 75% in 2009, down from 80% a year earlier, according to data reviewed for 2009 and 2010. The report claims that even though pension liabilities are not currently harming any state’s ability to fulfill its debt obligations, failure to act could have dire, long-term consequences.

Last year, the Pew Center on the States estimated that states face a $1 trillion gap for public pension retiree health and non-pension retirement benefits, based on 2008 data. “While the economic crisis and drop in investments helped create it, the trillion dollar gap is primarily the result of states’ inability to save for the future and manage the costs of their public sector retirement benefits,” said Susan Urahn, managing director of the Washington-based policy research organization, in a news release. “The growing bill coming due to states could have significant consequences for taxpayers — higher taxes, less money for public services and lower state bond ratings. States need to start exploring reforms.”

Pew’s study revealed the $1 trillion gap reflects states’ policy choices and lack of discipline for:

• failing to make annual payments for pension systems at the levels recommended by their own actuaries;
• expanding benefits and offering cost-of-living increases without fully considering their long-term price tag or determining how to pay for them; and
• providing retiree health care without adequately funding it.

However, other industry officials have claimed the level of unfunded liabilities among US public pensions is much higher than the $1 trillion claimed by Pew. According to a study last year by Joshua Rauh, a professor of finance at Northwestern University‘s Kellogg School of Management, the level could be as high as $3 trillion.