CHICAGO — The funded ratios of state pension plans remains on the decline even as investment returns rebound from losses. That has put more pressure on state balance sheets and tested their commitment to meet actuarially based contribution requirements, Standard & Poor’s says in a new report.
“Without exception, reduced pension-asset values relative to estimated liabilities is placing upward pressure on the annual required contributions of state governments, compounding what is already a difficult budget cycle for most states,” analyst Gabriel Petek said in the agency’s annual state pension report, “U.S. States’ Pension Funded Ratios Drift Downward,” released Thursday.
Based on the most recent data available, Standard & Poor’s said the mean funded ratio for state pension systems in 2009 was 75%, down from an 80% ratio for principal state pension plans in 2008. The report is based on pension fund valuation data available for 2009 and incorporates 2010 data when available. The rating agency this year also expanded its survey to cover pension plans over which a state has some amount of funding commitment where in past surveys it looked only at principal plans.
Unfunded pension liabilities totaled $661 billion in 2009. That figure cannot be compared to the previous year due to the expanded number of pension funds reviewed. Even with the aggregate decline in funded ratios, a dozen states remain above an 85% funded level while 31 states retain funded ratios of 70% or higher and 44 states have funded ratios of 60% or higher.
New York’s funded ratio was highest at 102% followed by Wisconsin at 99.8% while Illinois was the worst at 50.6% followed by West Virginia at 56%, according to the report.
No state is currently at jeopardy of defaulting on debt service because of the size of their pension liabilities or funding commitments. But states with low funded ratios could see their credit profile weakened if they chose to underfund their actuarially required contributions.
Pension fund assets took a dramatic hit due to equity losses in 2008 as a result of the financial crisis, but returns rebounded beginning in March 2009. Most pension funds smooth out their investment returns over several years so the phasing in of 2008 results is still negatively impacting the most recently reported actuarial results, driving up contribution requirements. About 88% of plans use a smoothing period of at least four years.
That puts states that are till struggling to balance their budgets in a difficult position to meet competing needs. “Early indications in 2011 suggest that deteriorating pension funded ratios — when coupled with a lack of full actuarial contributions — could serve as a source of potential credit pressure for some states,” the report reads.
The heightened national attention on public pension funds’ mounting liabilities has fueled pension reform efforts. Most measures have involved increasing contribution rates, cutting benefits, altering vesting periods, and age and service requirement changes. Many affect only new employees due to legal protections afforded to existing employees’ benefits. “Although such reforms do help to contain the growth of pension liabilities into the future, they do little to address existing pension liabilities,” the report notes.
Standard & Poor’s considered both the funded ratios and annual funding commitments in its review of a state’s credit, classifying pension obligations as a long-term liability to be funded over time. Though its payment does not constitute a “hard” liability like debt service, the rating agency gives comparable weight to pension liabilities and debt obligations when compiling a state’s debt and liability profile.
