WASHINGTON — State pension plans continue to face challenges despite the fact that their funded ratios are stabilizing, Fitch Ratings said in a report issued Wednesday.
The median funded ratio for major statewide defined benefit pension plans that reported 2013 actuarial valuations increased to 71.6% in 2013 from 69.1% the previous year. The slight rise contrasts with a median 14% decline in funded ratios in the period from the 2008-2009 recession until 2012, the rating agency said. Funded ratios compare a plan's total assets to its liabilities.
Plan stabilization occurred in part because of asset gains and, in some cases, benefit and contribution reforms that reduced actuarial liabilities, Fitch said.
Pension investment portfolio gains were strong in fiscal 2013, and plans' gains were generally stronger than discount rate assumptions. Also, in Montana, New Mexico and Ohio, the funded ratios have climbed in their most recent reports as a result of reforms that included changes to cost-of-living adjustments and increases in employee contribution requirements, the report said
However, most pension reforms haven't halted growth in actuarial liabilities in the past five years, since most reforms only reduce benefits for future hires, according to the rating agency.
Governments continue to make contributions to their plans that fall short of the actuarially calculated annual required contributions, or ARCs. Only about 40% of major statewide plans received full ARC payments in 2013. Underfunding of ARCs has occurred because of budgetary restraints during a slow economic recovery and, in some cases, an unwillingness to revisit contributions that are fixed by law, according to the report.
Many plans calculate their ARCs assuming a rolling, 30-year amortization of the unfunded liability, which means that plans can make little progress toward full funding unless investment gains exceed investment return assumptions, Fitch said.
Additionally, plans face growing challenges due to demographic changes, such as flat or declining government employment, rising numbers of retirees, and more years in retirement. "These trends raise plan liabilities and pressure cash flows through higher benefit payouts, shifting additional risk of plan performance to participating governments," the report said.
Most plans will report their fiscal 2014 plans in accordance with new standards from the Governmental Accounting Standards Board. Fitch said it expects few surprises from the first round of reporting under the new standards and believes it will provide more transparent data and several new useful tools for measuring pension-related credit risk. However, the new standards raise some concerns, such as that ARCs may not be reported by all plans, the rating agency said.
The median unfunded pension liability attributable to states is 3.3% of 2013 personal income, which is moderately higher than the median state debt burden of 2.6% of personal income. The range of unfunded pensions varies widely, from 0.2% to 19.3% of personal income, while the range of debt burdens is narrower, Fitch said.
