Wednesday, May 9, 2012

Sky Continues Not To Fall on Public Employee Pensions Around the Nation

The typical newspaper headline over the last few years has been about the failure of public employee pensions in certain cities and states to match their assets with their liabilities, meaning the benefits due to retirees. The doom-and-gloom headline would likely focus on one or two city or state plans that weren’t disciplined in funding their pensions on yearly basis, only to find themselves at some point potentially owing huge amounts for future retirement obligations they had made to people who’d dedicated their life to providing a public service.

The good news today is that we may see fewer of those sorts of headlines as cities and states do what they should to balance their books. And we are likely to see even fewer.

This week the Center for State & Local Government Excellence released a new report, “The Funding of State and Local Pensions: 2011-2015,” showing that public pension plans funded ratios slipped a modest 1 percent in 2011, to 75%, reflecting actuarial smoothing caused by a reduction in the growth rate of liabilities. In other words, as cities and states have cut back on hiring, and reformulated their plans to match income with outlays, the decline in funded ratio has declined at systems around the nation.

They didn’t say this, but I will: the system is working in terms of people across the nation coming to the realization that adjustments needed to be made to reflect a slow growth economy.

The study projects continued steadiness, and then improvements in funded status, as the economy and stock markets return to more ‘normal’ growth. Here’s the conclusion from their report:

The funded status of state and local pensions has been front page news since the collapse of financial markets in 2008. At the time, it was clear that the funded ratios of public plans would continue to decline as actuaries gradually averaged in the losses. Indeed, the funded status for 2011 was 75 percent compared to 76 percent in 2010. The decline was mitigated somewhat by much slower liability growth.

The reason that the growth in liabilities has slowed is that states and localities have laid off some workers, frozen salaries, and reduced or suspended COLAs. Because many of these changes are one-shot, liability growth is likely to pick up somewhat in coming years. Even if the liability growth rate picks up, however, phasing out years of low returns in the actuarial averaging process should lead to an increase in assets under our “most likely” stock market scenario. Specifically, if the stock market increases at about its historical rate over the next four years, the funded ratio for state and local plans should increase gradually to 82 percent in 2015.

The critics of defined benefit plans like to use scare tactics in their campaigns against public employee pensions, but the general public should see this report as continuing evidence that the “crisis” is whipped up and manufactured. Leave the system to work itself out. 

The chart below shows the funded status of Texas’ biggest state pension systems, and is available on page 12 of the report. --- Max Patterson

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