Even as funding ratios for U.S. state pensions stabilize, state and local government workers are retiring at a higher rate than new employees are being hired, and this is putting additional pressure on their pension systems, Fitch Ratings said in a report released on Thursday.
Fitch said the median funded ratio for major state pension systems was almost unchanged for the second year in a row at 71.5% in 2014. Several years of strong market gains have offset rising liabilities, according to the report. However, the recovery of the systems’ investment portfolios has not necessarily meant a recovery in their funded ratios, according to Senior Director Douglas Offerman.
“Unlike asset portfolios that are prone to year-to-year cyclicality, pension liabilities have risen steadily for all but a handful of closed systems because active employees continue to accrue benefits as they work,” Offerman said in a press release. “Additionally, few pension systems have implemented benefit reforms that immediately reduce liabilities.”
As a result, funded ratios have not returned to their pre-recession peaks.
And changing demographics are increasingly weighing on state pension liabilities, the report stated.
The major pension system’s median ratio of active employees to retirees and beneficiaries fell to 1.4 in 2014. This is in contrast to a median ration of 1.9 in 2008, which Offerman said indicates longer retirements which means higher pension payment obligations.
“Headcount for numerous state and local governments has been stagnant,” Offerman said, “while weakening demographics is shifting more of the contribution burden onto government employers.”
States’ median debt burdens totaled 2.4% of personal income in 2014 while the median pension burden was 3.7% of personal income, according to Fitch. The debt burden for last year was slightly lower than in Fitch’s previous update while the unfunded pension burden was slightly higher.
Meanwhile, Fitch said that contribution practices have been improving as actual pension contributions relative to governments’ actuarially calculated levels moved to their highest level since fiscal 2009.
However, in nearly half of the systems that were reviewed by Fitch, the contribution was inadequate relative to the levels calculated by actuaries.
In fiscal 2014, 53% of major statewide systems received at least 100% of the actuarially-calculated contribution, up from 42% in fiscal 2011, the report stated.
