Pension Funding Ratios Rise

WASHINGTON - The traditional funded ratio of state and local pension plans rose for the first time since the financial crisis and may continue to rise in coming years, according to a new study by the Center for Retirement Research at Boston College.

The report, authored by CRR researchers Alicia Munnell and Jean-Pierre Aubry, examined state and local pension funding in fiscal year 2014 and projected it until fiscal year 2018. The funded ratio for a sample of 150 state and local pension plans rose to 74% in fiscal 2014 from 72% the previous year, the report found, while the required contribution as a percentage of payroll rose to 18.6% in fiscal 2014 from 17.8% in fiscal 2013.

State and local pension funding levels are important to investors and analysts because pension obligations and bonds are often paid out of the same tax revenue and can contribute to a repayment risk in a distressed scenario. The Securities and Exchange Commission has also signaled that it is watching municipal pensions closely, and has brought enforcement actions against issuers who understated how badly underfunded their systems were. The SEC charged Kansas in August of last year, and Illinois in 2013.

Government Accounting Standards Board standards effective for fiscal years beginning after June 15, 2013 replaced the Annual Required Contribution (ARC) with the Actuarially Determined Employer Contribution (ADEC). Both numbers are supposed to represent what the employer must contribute to its pension plan to keep it on a path to full funding. While previous GASB standards restricted the assumptions and methods that governments could use to calculate the ARC, the ADEC is not so rigid. But the CRR study found that its sample showed little change as plans shifted from using the ARC to the ADEC.

"For the plans in our database, the ARC and ADEC are nearly identical," the authors wrote, allowing the report to use the new ADEC data alongside the historical ARC figures.

Public pensions are paying a rising percentage of that required contribution as revenues have recovered in the aftermath of the recession, the report found, rising to 87.6% in fiscal 2014 from 82.2% the prior year.

Most plans are assuming a 7.6% investment return, the report said, while many investment firms are predicting something between 4% and 5%. The CRR study produced two projections for the next four years, looking at future funded rations under both the stronger and weaker assumptions.

"What happens from here on out depends very much on the performance of the stock market," the report concluded. "In 2018, assuming plans achieve their expected return, they should be 81% funded. If returns are lower, as predicted by many investment firms, funding will stabilize at about 77%."

 

 

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