Public pension investments up, reforms afoot

WASHINGTON Thu Jun 30, 2011 4:30pm EDT

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WASHINGTON (Reuters) - Investments made by public employee retirement systems are rising in value, Census data showed on Thursday, but the gains will not close their shortfalls or end the nationwide fight over revamping them.

Total holdings and investments at the 100 largest public retirement systems grew 3.6 percent, to $2.7 trillion, in the first quarter of 2011 from the final quarter of 2010, the Census said. That marked the third straight quarter of growth.

From a year earlier, returns were up 10.2 percent, the sixth consecutive quarter of year-on-year gains.

"The cost of these pension plans has gone up. Just as it takes a few years for the higher costs to take effect, it will take a few years for these investment gains to take effect," said Keith Brainard, research director at the National Association of State Retirement Administrators.

"I don't foresee these market gains dampening the interest to make changes to benefit levels and financing arrangements."

Earnings from investments are the largest source of pension funding, accounting for two-thirds of revenues. Employer contributions, essentially the taxpayer bill, comprise about a quarter of funding, and deposits from employees the rest.

Typically, when investment returns are low, governments increase contributions. But during some of the worst budget crises in recent memory, state and local governments cut back just as the stock market plunged.

As most states and cities enter their new fiscal year this week, they are worried about funding future retiree benefits without having to cut spending on other vital programs. Most states are legally bound to pay retiree pension benefits.

Almost everyone agrees pension funds can pay for current retirees but are short on future obligations. Estimates of the shortfall range from just under $700 billion to $3 trillion, based on how investment returns are forecast. Many governments want to make up that gap by having employees pitch in greater amounts of money.

ASKING EMPLOYEES TO PITCH IN MORE

The Census found the funds' corporate stock holdings -- their biggest investment allocation -- rose 3.4 percent to $896.4 billion in the first quarter of 2011 from the fourth quarter of 2010 and 6.3 percent from the previous year.

International securities increased 3.8 percent to $507.6 billion, the highest level since the Census began collecting data in the category eight years ago.

The 100 largest public retirement systems represent nearly 90 percent of all public pension financial activity.

For fiscal 2012, which for most states starts July 1, at least four states have enacted budgets that require employees to make larger pension contributions, according to a database of the National Conference of State Legislatures.

New Jersey this week approved a law requiring employees to put in more money.

As of June 3, 23 states had increased employee contributions in 2010 and 2011, according to Ron Snell, senior fellow at NCSL.

Still, the Census data showed both employee and government contributions decreased in the first quarter of 2011 from the previous year by 5.3 percent, to $31.5 billion. Employers cut contributions in the face of budget gaps, but there were other factors, Snell said.

"One reason the contributions would fall is that state employment is falling," he said. "Also, local government employment is falling faster than state employment."

The declines shrank the number of people making contributions, as well as how much money governments put in. Also, many employers froze salaries or implemented furloughs that depressed pay levels used to calculate pension costs.

Local government employment in May was 14.165 million jobs, the lowest since July 2006, and state government employment was 5.111 million, the lowest since January 2007, according to the Bureau of Labor Statistics.

(Reporting by Lisa Lambert; Editing by Dan Grebler)

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