Outlook "mixed" for public pension funds: study

SAN FRANCISCO Tue May 24, 2011 4:27pm EDT

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SAN FRANCISCO (Reuters) - Public pension fund finances face a mixed outlook, with better investment returns and shrinking government work forces offset by smaller government payments, a study released on Tuesday said.

The report by the Boston College's Center for Retirement Research comes as pension costs pose a top concern for state and local officials and investors in the $2.9 trillion municipal debt market.

State and local governments have been paying less of their annual required contributions to pension plans in recent years due to slumping revenue that threw budgets into disarray.

The study pegged the ratio of assets to liabilities for its sample of 126 state and local public pension plans at 77 percent last year, compared with 79 percent in 2009.

That means the plans last year had an estimated $2.7 trillion in assets, compared with $3.5 trillion in liabilities, or obligations they must meet.

The gap threatens to grow if government employers further reduce their financial support for public pension funds.

"In 2010, employer contributions equaled only 78 percent of the required payments," the study said, noting that was down form 84 percent in 2009 and well below the 100 percent contribution level in 2001.

In San Francisco, for instance, Mayor Edwin Lee unveiled a plan on Tuesday proposing the city restructure its pensions. Their cost is seen more than doubling to $800 million in 2014.

OFFSETTING REDUCED CONTRIBUTIONS

"Not surprisingly, with the drop in state and local revenues and increased spending pressure on safety net programs, employers are contributing a smaller portion of the required payment. Taken alone, this pattern suggests worse funding problems in the future," the study said.

To offset lower contributions to pension plans, states and localities have been imposing measures to relieve them of some financial burdens.

The measures include freezing salaries and layoffs, which indirectly reduce pension liabilities.

Additionally, new employees may be receiving less generous retirement benefits. That helps slow growth in pension liabilities and workers are being pressed to contribute more toward their pension accounts.

The stock market also may help narrow the gap between the assets and liabilities of public pension funds. But that may be a challenge over the short run.

"Specifically, the market would have to do very well in 2011 and 2012 to keep the actuarial valuation of assets from declining as the bull market years of 2006 and 2007 are dropped from the averaging calculations. However, looking further out -- even if the stock market stays at its current level -- the actuarial value of assets should pop up in 2014 and 2015 as the years 2008 and 2009 rotate out."

"If the stock market improves substantially, the funded status of plans should look even better by 2014," the report added.

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