WASHINGTON The finances of public pensions rebounded in the final quarter of 2011 from the quarter before, but the cash and security holdings were still below end-of-2010 levels, according to U.S. Census data released on Thursday.
Gains in stocks and international securities lifted holdings 3.2 percent from the third quarter to $2.61 trillion, slightly less than the $2.64 trillion in the fourth quarter of 2010.
"The public pension funds, in the main, last year went about sideways, said Keith Brainard, research director for the National Association of State Retirement Administrators, adding that the median investment return was around 1 or 2 percent. "And the fourth quarter was strong after that very difficult third quarter that included the market losses."
The 100 largest state and local government employee retirement systems earned $97.1 billion on their investments in the fourth quarter, compared to the $198.8 billion loss they suffered in the third quarter, which was the first loss in more than a year and the largest in more than five years.
"In the middle of the year we're seeing three things," said Hank Kim, executive director of the National Conference on Public Employee Retirement Systems. "First, the ripple effects in the supply chain from the tsunami and nuclear disaster, I think, impacted some of the economic growth and the market. Second, you had the whole silliness with the raising of the debt ceiling. And in Europe you had the crisis."
Last summer the U.S. Congress and President Barack Obama agreed to a plan to start cutting $1.2 trillion in spending in 2013 after a long stand-off over the country's $1.3 trillion deficit and $15 trillion debt.
"The first quarter of 2012 should be good," Kim said. "If you look at the broader markets, I think they came to life since January 1. Hopefully when the market closes on Friday, we can capture that."
Meanwhile, employees pitched $9.2 billion into the retirement systems over the quarter, slightly down from the $9.5 billion they contributed during the same period a year ago.
Government contributions, essentially the taxpayer tab, also dipped, to $21.5 billion from $22.4 billion the year before.
Still, total contributions grew throughout 2010 and 2011, and the total $33.4 billion that governments and employees put in during the second quarter of 2011 was the highest in more than five years.
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.
With recent retirement breakdowns in Rhode Island and the threats of further fiscal stress in other places, states are worried about how to fund future retiree benefits without cutting spending on other vital programs. Most states are in the thick of budget negotiations for the upcoming fiscal year, and many are bound by their constitutions 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. The systems prefer using historical averages, while critics say they cannot bank on achieving the return highs they experienced before the crisis.
California's pension fund for public employees made international headlines earlier this month when it lowered its assumed rate of return to 7.5 percent from 7.75 percent.
The financial crisis caused the earnings on public pensions investments, the funds' largest sources of revenue, to plummet for three quarters in a row from the end of 2008 to the beginning of 2009. The value of their holdings scraped the bottom at $2.09 trillion in the first quarter of 2009.
Since then, they have slowly inched closer to the $2.92 trillion they reached in the final quarter of 2007, before the recession devastated their balance sheets.
"Public pension funds keep a long-term perspective, and it has been a strong few years since the bottom of the market in 2009," Brainard said.
(Editing by Andrea Evans)