Written by Ron Saathoff, director of the Pension Resource Department, International Association of Fire Fighters
The Pew Center on the States released a report on Tuesday titled “The Widening Gap: The Great Recession’s Impact on State Pension and Retiree Health Care Costs.”
This report accurately reflects the impacts of the worst economic recession since the Great Depression. State pension funding fell from 84% in 2008 to 78% in 2009, a significant decrease. The Government Accountability Office advises states to have at least an 80% funding level. The report calls the decrease in pension funding “a worrisome trend.”
Is it really?
Part of the answer lies in what has happened to the financial market since 2009. The National Conference on Public Employee Retirement Systems (NCPERS) just completed a public fund study covering 216 public retirement funds with over 7.5 million members and assets exceeding 900 billion dollars.
The results produced an average 1-year return of 13.5% in 2009. Despite criticisms that an 8% investment return assumption is too high; these plan investments returned an average of 8.2% during last twenty years. Thirty year returns are even higher, approaching 9%.
According to the NCPERS study, investment returns are the single most significant source of plan funding, comprising about 76% of plan assets including employee contributions.
Only 24% of plan assets are paid by the taxpayer. The point is that defined benefit pension plans have a 30 year time horizon. Analyzing public pension plan performance over one or two years is simply wrong and does not paint an accurate picture of long term funding levels.
Does this mean there are no problems with some public pension funds?
Almost, without exception, the plans that are under 80% funded have plan sponsors (employers) that failed to make their annual required contribution (ARC) to fund the plan. For example, failing to pay a mortgage or to pay less than required produces a mortgage balance that is larger than the original bill.
In some of the least funded plans, such as New Jersey, full payments were ignored over several years. In 2002, the New Jersey state plan was 100% funded, today funding is about 66%. Right next door in New York, where regular contributions were diligently made, the state pension plan is funded at 101%.
The PEW report correctly states that “precipitous revenue declines in fiscal year 2009 severely depleted state coffers…” In fact, state revenues have declined 15 to 20% as a result of the current recession.
As a result, pension fund assets declined. Even with the market downturn, pension costs are a manageable 3 to 5% of state budgets. Additionally, during the previous 18 to 24 months, investment returns have been above 10%.
Public pension systems should not be entirely blamed. The real issue with state budget shortfalls is the decline in revenue coupled with an increased demand for social services caused by the greatest economic downturn since President Herbert Hoover’s tenure.
Public pensions provide a great benefit at a low cost to the taxpayer, if only the employer pays their part of the mortgage.