* Stocks, corporate bonds in funds' holdings up vs year ago * International securities' holdings highest in nine years * But public pension liabilities keep growing
By Lisa Lambert
WASHINGTON, Sept 29 (Reuters) - Public pensions, stung by the financial crisis and government cutbacks, have enjoyed steadily improving investments for nearly two years, mostly due to stocks, U.S. Census data released on Thursday showed.
In the second quarter of 2011, public pensions' total holdings and investments rose for the fourth quarter in a row to the highest level since the middle of 2008, the Census said. From the quarter before, they rose 1.3 percent to $2.8 trillion. And from the year before, they jumped 17.6 percent to $2.4 trillion.
It was the seventh straight quarter of growth.
"There's been a substantial improvement in assets, and that's a good sign, but it doesn't mean pensions are out of the woods," said Ron Snell, who tracks the issue as a senior fellow at the National Conference of State Legislatures.
Namely, much of the improvement came from rising stock markets, which fared better earlier in the year when the data was collected. Census numbers from earlier this week told a similar story for state and local government revenue. [ID:nS1E78Q17W]
In the second quarter, public pensions' stock holdings decreased 1.5 percent to $892.2 billion from the quarter before. But that was 19.5 percent more than in the second quarter of 2010.
Meanwhile, public pensions' corporate bond holdings rose 2 percent from the previous quarter and 5.6 percent from the year before to $438.5 billion.
Public pensions' international securities, too, advanced 2 percent from the previous quarter to $522.6 billion, the highest level on records dating back to 2002. It was also 28.7 percent more than the second quarter of 2010.
"It's going to be largely dictated by the forces of the larger economy," said Hank Kim, executive director of the National Conference on Public Employee Retirement Systems, on whether the pension funds will continue improving. "If we can get some leadership from Washington, D.C., and if the European Union can get the political will to do the right thing, the headwinds will be removed."
Investment earnings are the largest source of pension funding. Employer contributions, essentially the taxpayers' bill, make up about a quarter and deposits from employees the rest.
Typically, when investment returns are low, governments increase contributions. But during recent budget crises, they cut back just as the stock market plunged. Pension fund holdings still have not returned to the highs they reached at the end of 2007, before the financial meltdown.
That has worried voters and political leaders. Most states and cities are legally bound to pay retiree benefits, and if fund assets remain sickly, the governments will have to cut spending on other vital programs to make up the difference.
EMPLOYEES PAY MORE, BUT LITTLE IMPACT
Almost everyone agrees pensions can pay 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.
The accounting board for the public sector has proposed changing how the rate of return is projected, suggesting pension funds with insufficient assets rely on a rate of about 4 percent. Historically, pensions have earned around 8 percent on investments.
Last week, the Governmental Accounting Standards Board extended the comment period on its proposal, citing "competing priorities of the financial statement preparer community."
Many governments want employees to pitch in more.
Snell noted employee contributions to retirement plans in the public sector are greater than in the private sector. Still in 2010 and 2011, 25 out of 50 states required employees to put in more money. But some states, including Wisconsin, concurrently cut employer contributions to balance their budgets.
On top of that, a rash of public-sector layoffs over the last year has left fewer employees contributing.
Census said employee and government contributions combined in the second quarter rose 12.1 percent from the year before to $34.2 billion. But employee contributions alone decreased 3.2 percent.
"The contribution rates are going up and the only reason it would drop in an aggregate fashion is the number of employees are deceasing, or they're taking furloughs," said Kim.
Snell noted many hikes in employee contributions went into effect recently, so they have yet to show up in Census data.