The funded ratios of state pension systems continue to fall but the rate of decline is tapering, Fitch Ratings concluded in a report Tuesday.
There are numerous factors that can be attributed to the decline including “past market losses that are continuing to be smoothed into reported funded ratios, the impact of assumption changes and, in some cases, the underfunding of annual contributions by states,” Fitch said.
Most pension systems use an asset smoothing mechanism, typically five years, to recognize changes in investment values relative to their assumed return. As a result, many pension plans are still absorbing the deep, recessionary losses, the rating agency said.
Pension plans have continued to experience uneven investment performance since the financial crisis and, consequently, funded ratios have continued to decline. Investment performance in 2012 was mostly flat for most pension plans and well below return assumptions, adding to downward pressure on funded ratios, the report said.
More than one-half of major statewide pension plans have lowered their investment return assumptions since the economic downturn. Fitch said that individual return assumptions at 8% are unrealistic and should instead look at 7% to improve comparability across plans.
Pensions remain a growing pressure for numerous states’ budgets and the vast majority of states with pension challenges are pursuing reforms to improve sustainability. Most states are well positioned to address the pressures from unfunded pension liabilities and rising contributions, Fitch said.
“In only a few cases are reforms having an immediate, beneficial impact on funded ratios,” the report said.
The median burden of debt and unfunded pensions measures 7% of personal income, but the range is from 1.8% to 24.8%, the report found.
The report also noted that the new Governmental Accounting Standards Board pension changes represent a net improvement in disclosure. The rating agency said that after the new standards are implemented it expects to review its approach to reported pension data.
Meanwhile, last week Sen. Orrin Hatch, R-Utah., ranking member of the Senate Finance Committee introduced public pension reform legislation bridge the gap between system plan shortfalls. The Secure Annuities for Employee Retirement Act of 2013 allows state and local governments to invest in annuity contracts with private life insurance companies for employee retirement benefits.
Hatch warned that two years ago, state and local pensions had a shortfall of as much as $4.4 trillion in their collective public pension systems.