Survey Shows 25 States Underpaid Pensions in 2009

(October 25, 2010) — Twenty-five US states have contributed less money to their retirement funds in 2009 than the annual required contribution (ARC) that actuaries calculated for each of them. The number was slightly higher from 23 a year earlier, according to a recent survey by Loop Capital Markets.

“I think this problem is really analogous to the individual investor trying to save for retirement,” Christopher Mier, Loop’s lead municipal strategist, told aiCIO.  “It’s very hard to come up with a number for annual contribution – each state needs to make a substantive payment every year – it’s got to be something based on the numbers actuaries have provided. Pension holidays, a euphemism for states that fail to make an annual contribution, need to stop,” he said, adding that he believes funding will improve marginally with increased political pressure in 2010. 

The firm’s eighth annual report found that 25 states failed to make adequate payments into their pension for teachers and public employees for any of the three years from 2007 to 2009. States that did not meet their contribution levels for all plans for the last three years include Alaska, California, Colorado, Delaware, Illinois, Iowa, Maryland, Minnesota, Missouri, Nevada, New Hampshire, New Jersey, New Mexico, North Dakota, Oklahoma, Pennsylvania, Vermont, Virginia, and Washington.

“The approach to valuing pension liabilities is more cut and dried in the corporate market, because unlike the public sector, they have more explicit rules that keep them much more focused on the straight and narrow. With the public sector, there’s no ERISA, for example, so when times get hard, they tend to underfund.”

Mier said states need to recognize the funding problem and contribute as much as possible this year, and all future years. The study by the Chicago-based investment bank reviewed a total of 244 of the largest state plans and discovered that the funded ratios have worsened for nearly all the plans that submitted funded ratios. About 93% of the 145 state plans reviewed in both 2008 and 2009 that submitted funded ratios witnessed declines, and only 58 of a total of 149 plans reviewed for fiscal 2009 reached the 80% funded ratio that is considered adequate. Only 24 of the 73 plans with assets of more than $1 billion met the 80% threshold, according to the report.

The report found that while the average returns were significantly higher than the assumed average investment return assumption of 8%, they were still not sufficient to cover the severe losses experienced in the last two fiscal years as a result of the current recession, which left states facing a total of $110 billion in revenue shortfalls, according to the Washington-based Center on Budget and Policy Priorities. According to a Bloomberg analysis of state pensions, funding levels across the 50 states ranged from 51% in Illinois to 107% in New York.