Improvement Needed for State Pension Funding Levels

August 26, 2013 (PLANSPONSOR.com) – U.S. state pensions are showing some signs of stabilization, but significant improvement in funded levels will take many more years, said a new survey.

According to “A Bumpy Road Lies Ahead For U.S. Public Pension Funded Levels” from Standard & Poor’s Ratings Services, the 50-state average funded ratio fell by about 1% to 72.9% in 2011 compared with 73.7% in 2010. This was smaller than the 1.6% drop noted in the 2010 survey and much smaller than the 7% decline from 2008 to 2009. The 50-state median fell by 2.2% to 69.8% from 72%--a similar rate of decline as in 2010 (2.1%) and much lower than the 6% decline in 2009.

The road to pension funded level improvement will be bumpy, said the survey’s authors. Although a decelerating rate of decline is positive, they expect states will need to actively manage pension funds to ensure their long-term sustainability. The authors also expect to see factors such as market volatility, the implementation of Governmental Accounting Standards Board (GASB) Statements 67 and 68, and ongoing pension reform efforts to affect pension valuations. For weaker funded systems, the authors see a problematic funding environment as growth in pension contributions consumes a larger part of those states’ budgets.

The survey also found that states continue to operate cautiously, given uncertain revenues and expenditures. Although revenues for most states have returned to pre-recession levels, they have not kept pace with spending pressures. State officials are facing budget challenges as they deal with demands to restore service levels, reduce taxes and implement the provisions of the Affordable Care Act (ACA).

Other findings by the survey include:

Pension funded ratios continue to decline as the investment losses from 2008 and 2009 are smoothed into actuarial value of assets. However, these declines seem to be decelerating;
Efforts to reform pension systems are far from over and are intensifying as more policymakers look to make structural changes to their systems that will significantly lower liabilities;
The implementation of GASB pension reporting and accounting changes, in most cases, will result in the reporting of a greater and more volatile unfunded pension liability;
States’ decisions on what pension funding policy to adopt and their discipline in adhering to the policy are likely to shape the future direction of pension funded levels; and
Most states have sufficient assets in their pension trusts to fund benefits payments over the near to medium term and in many cases, long term. Under the new GASB statements, the crossover point used for discount rate blending will better identify situations when assets will no longer be available to fund benefits.

Standard & Poor’s covered valuation data through 2011 for all state-sponsored plans. The data showed that the average funded ratio continued to weaken, although only slightly. The data was from 2011 valuations and reported in the states’ 2012 comprehensive annual financial reports (CAFRs), the latest year for which CAFRs are available. The wide spread between the highest and lowest funded state plans showed the significant variation among the funded ratios of state plans.

In 2011, pension funded ratios dropped for 34 of the 50 U.S. states, remained unchanged for six, and increased for the remaining 10 states, according to the survey. The average funded ratio change for the 50 states was -0.8% but changes to individual plans ranged from a 7.3% decline to as much as an 11.6% increase. When looking only at the states that had declines, the survey found that the average drop was 2.5% with a median decline of 2.2%. Of the 13 states that had increased funded levels, the average increase was 3.9% with a median increase of 1.6% and ranged from 0.2% to 11.6% increases in individual funded ratios.

The top five states by funded level include Wisconsin (99.9%), South Dakota (96.3%), North Carolina (95.3%), Washington (93.7%) and New York (92.7%). The bottom five states in terms of funding level include Illinois (43.4%), Kentucky (53.4%), Connecticut (55%), Louisiana (56.2%) and New Hampshire (57.4%).

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Kevin McGuinness
editors@plansponsor.com