BOSTON — Pension and OPEB funding levels vary sharply by state, a Federal Reserve Board senior economist staff said Thursday.
'The bottom line is that it is all driven by Medicaid. Excess cost growth is the main culprit," Byron Lutz said at a municipal finance conference co-hosted by The Bond Buyer and Brandeis International Business School.
"There is a strong heterogeneity among the states," Lutz added. For example, fiscally conservative New Hampshire has a large unfunded pension liability. North Carolina, he said, is fully funded with its pension liability obligations, but has a considerable gap in OPEB, or other post-employment benefits.
Cutting back on pension and OPEB payments, according to Lutz could be counterproductive. "It's not a free ride," he said. "Reducing compensation packages could make it harder to attract and retain public-sector employees, especially those that are high quality and high paying."
Lutz, an economist at the Fed since 2005 and a senior economist since 2010, spoke at a panel examining retiree benefits and long-term fiscal health, with Detroit's recent bankruptcy filing and struggles with unfunded pension liability in other states and localities. Moderator Kurteric Forsgren, a managing director at Standard & Poor's, said challenges include quantifying healthcare obligations on top of pensions, evaluating the solvency of pension plans and studying how the marketplace evaluates risks related to OPEB.
"Pensions and OPEB are foremost in everybody's minds," said Forsgren, who has worked in revenue-backed areas generally and on transportation infrastructure specifically since 1992.
More than 3,400 local and state pension plans serve an estimated 27 million U.S. public sector employees.
Gordon Latter of Ryan Labs Asset Management, which specializes in quantitative fixed income asset management and manages fixed income assets, spoke about solvency evaluations. "All pension funds should have solvency evaluations. This is like a home game because 90% of you agree with me," he said. He analyzed how Canada conducts solvency evaluations.
When armed with the information that solvency valuations, pension plan administrators made more sound decisions, Latter said. Latter praised New York City for its transparency in reporting the funding levels of its five public-sector pension funds.
The two-day conference features academic and practitioners elaborating on recent developments in the municipal credit markets. Brandeis finance professor Daniel Bergstresser called the get-together at the Park Plaza hotel "an interesting and eclectic conference."
Lebenthal & Co. director James Lebenthal, in his keynote opening address, touted the importance of municipal bonds to rebuild infrastructure.
