Analysts are warning that weak investment returns for public pension funds in fiscal 2012 are likely to pressure state and local government budgets.
On Monday the California Public Employees Retirement System, known as CalPERS, the largest public pension in the country, reported a 1% return on investments for the fiscal year that ended June 30.
“Fitch expects numerous systems to report similarly disappointing returns,” senior directors Doug Offerman and Rob Rowan wrote in their report. “This is likely to further pressure pension systems’ funded ratios and lead to higher annual contributions for state and local governments.”
Wells Fargo Securities LLC managing director of municipal securities research,Natalie Cohen, agreed that many pensions will probably soon disclose having limited returns in the past fiscal year.
“The long-overdue day of reckoning for pension systems has arrived,” said Jeff Schoenberg, Illinois’ assistant Senate Majority Leader. “For far too long the projected rate of return has leaned on the liberal side and forestalled an inevitable readjustment of the assumptions to a more realistic level.”
Illinois had a retirement system funded ratio of 43.3% as of June 30, 2011.
“Everyone knew that the assumptions of 8-8.5% rates of return would have to be recalibrated,” Schoenberg said. “The net result is that for public pensions the run to the end zone has just got much further.”
Changes to pension investment return assumptions will force states to cut budgets and reform pensions, he said.
The funded ratio for localities and states went from 103% in 2000 to a projected 75% in 2012, according to the Boston College Center for Retirement Research. That is a weighted average based on the sum of all assets divided by the sum of all liabilities in a sample of 126 major state and local pension plans.
With a funded ratio between 60% and 61% in its two largest pension funds, New Jersey is another state with a problem. A law passed in 2010 requires the state’s government to increase the portion of the actuarially required pension contribution actually contributed by a seventh each year.
Last fiscal year the contribution was at one seventh. This fiscal year it will be two-sevenths, which is $1.1 billion. However, the actuarial required contribution would be $3.8 billion, according to New Jersey Assemblyman Gary Schaer.
“Clearly those numbers are problematic,” he said, adding that New Jersey has taken steps to reduce pension liabilities.
New Jersey’s pension had good returns in fiscal 2011 but probably will have had less in the previous year, Schaer said. New Jersey should be funding pensions at a higher level.
Analysts have varying responses to recent low pension returns. “Although public pension funds, like other investors, have experienced sub-par returns over the past decade, median public pension returns over longer periods meet or exceed the assumed rates used by most plans,” the National Association of State Retirement Administrators said July 9.
“There’s still a pension funding problem, but there’s time to deal with it,” said Elizabeth McNichol, senior fellow at Center on Budget and Policy Priorities.
Since 2009 43 states have taken action to address pension underfunding, according to the National Conference of State Legislatures.
In fiscal 2012, “CalPERS’ performance is a case study in the challenges facing large pension funds (and all investors) in a world without yield,” wrote Michael Lewitt, portfolio manager for Cumberland Advisors. “It is time for a new intellectual regime that recognizes that low interest rates are here to stay, but neither assures low fixed-income returns nor promises high equity returns,” Lewitt wrote.
