WASHINGTON — The estimated aggregate funded ratio of 150 state and local pension plans was unchanged at 72% in fiscal 2013 because actuarially smoothed assets grew modestly and the California Public Employees' Retirement System significantly revised its reported funded ratio, a group said in a report released Tuesday.
The Center for Retirement Research at Boston College looked at plans in its public plans database, which includes 114 state plans and 36 local plans. Most of the plans report their valuations on a fiscal year basis. About two-thirds of the plans in CRR's sample had reported their fiscal 2013 funded levels by early May. Assets and liabilities were estimated on a plan-by-plan basis for the plans that had not yet reported FY 2013 valuations.
The estimated aggregate funded ratio of the plans for FY 2013 was the same as in the previous year and similar to the levels in other years since the financial crisis. The aggregate actuarial value of assets in FY 2013 was $2.9 trillion, and the value of liabilities was $4.1 trillion, the report said.
The funded levels varied substantially among the 150 plans in FY 2013. Nearly half the plans had funded ratios of 60% to 79%, but 3% of the plans had funded ratios of 20% to 39%, and 6% had funded ratios of at least 100%. The report said many of the poorly funded plans are relatively small, but several large plans also had funded levels below 50%.
Aggregate funded ratio remained unchanged in FY 2013 for two reasons, CRR said. First, the actuarially smoothed value of plan assets only increased by 2%, despite strong stock market performance. Asset values generally are averaged over a five-year period, and these averages increased only modestly since they included the poor returns from 2009.
Second, CalPERS, one the country's largest plans, changed its assumptions and the way it values its assets. CalPERS' funded ratio decreased to 69% in 2013 from 83% the year before, according to the report.
State and local government sponsors of pension plans are paying more of their annual required contributions as their revenues are recovering. CRR estimated that sponsors of the plans in their database paid 83% of the required amount in FY 2013, up from 81% the previous year.
Starting for fiscal 2014, public pension plans will use new accounting standards from the Governmental Accounting Standards Board. The new standards include two major changes concerning the valuation of assets and liabilities. One is that assets will be reported at current market value, as opposed to being actuarially smoothed. This should help funded ratios because market assets are projected to outpace actuarial assets in 2014, CRR said.
The other is that plans whose assets are projected to be insufficient to cover future benefits will be required to use a discount rate that is lower than the expected long-run rate of return of assets. However, CRR said it's unclear the extent to which discount rates will change for reporting purposes because governments are likely to claim that they will have enough assets to cover their benefits.
CRR predicts that without any adjustment to discount rates, the funded ratios for FY 2014 funded ratios will be higher than the ones for FY 2013, since stock prices have been rising. If the stock market continues to be healthy and plans don't adjust their discount rates, plans should be at least 80% in FY 2017. But if plans widely adopt lower discount rates, the funded ratios will be lower than 80% over the next few years.
