Is the public pension fund system facing a collapse or a temporary shortfall in part to the financial crisis from a few years ago? A new report suggests that it’s more than just a provisional monetary gap, and a fiduciary problem that needs to be addressed immediately.
A new report from Moody’s released Thursday entitled “US State and Local Government Pensions Lose Ground Despite Meeting Return Targets” highlights that the 25 largest United States public pensions are building unfunded liabilities of approximately $2 trillion, a signal that returns on investment are failing to keep up with skyrocketing obligations.
The study notes that the 25 largest funds by assets averaged a return of 7.45 percent from 2004 to 2013, which was close to the initial projection of 7.65 percent rate of return. However, in that same time frame, the amount of liabilities nearly tripled that figure.
Financial experts cite the recession that lasted nearly two years and ending Jun. 2009 – though many believe the U.S. is still in a recession – as being the culprit to eviscerate values and reductions in contributions. Moving forward, liabilities remain the biggest hindrance to spending on essential services, such as education, roads and other public services.
“Despite the robust investment returns since 2004, annual growth in unfunded pension liabilities has outstripped these returns,” Moody’s said in its report. “This growth is due to inadequate pension contributions, stemming from a variety of actuarial and funding practices, as well as the sheer growth of pension liabilities as benefit accruals accelerate with the passage of time, salary increases and additional years of service.”
Moody’s noted that the largest systems that were included in the report manage just less than half of the $5.3 trillion U.S. public pension system, including California Public Employees’ Retirement System, the California State Teachers’ Retirement System and the New York State and Local Employee Retirement System.
The credit rating agency, though, did spotlight two pensions that are operating quite well: the Tennessee Consolidated Retirement System and Wisconsin Department of Employee Trust Fund.
In the spring of last year, according to Bloomberg News, Moody’s announced that it would incorporate a more conservative method of calculating liabilities that would be far different than how state and cities do it. Moody’s now utilizes market-based discount rates, which has led to estimates that showcase pension liabilities being a lot higher than how the systems report it themselves.
“Part of the problem for the level of overall funding is that it is inherently difficult to recover an overall asset position after the double-digit losses seen during the recession,” said Al Medioli, a Moody’s vice-president, senior credit officer, in a statement. “Annual return may be strong, but incremental gain is small relative to pre-downturn levels because the investment base is so much smaller.”
Earlier this month, Forbes magazine ran a headline stating “Public Pensions Are Still Marching To Their Death” in which contributor Jeffrey Dorfman opined that public pension funds are marred with problems and have remained underfunded for the past five years.
He wrote: “If public pension plans are losing ground on their funding status in years when the market is delivering above normal returns, is there any hope for their survival?
“The answer is probably not, but if there is a way to save public pension funds, it will require a new political calculus by the two parties most responsible for the current sorry state of affairs: state politicians and government employee unions.”
Reuters reported last week that city and county pension funding rose close to six percent last year.
