WASHINGTON Feb 5 Cities and local governments
are likely to put more money into their public pension plans
than U.S. states, but conservative investments have led their
retirement systems historically to be worse-funded, a Boston
College study released on Tuesday found.
States and local governments are short billions of dollars
for retirement promises made to employees, with Pew Center on
the States recently estimating cities' shortfall at least $99
billion. The underfunding has of late pushed cities toward
bankruptcy and states into protracted political fights.
More than half of local governments send money to
state-administered retirement systems, lumping their employees'
pensions in with those of state workers. The college's Center
for Retirement Research, though, looked only at plans of varying
sizes administered directly by local governments.
The research found that in 2007, at the start of the
recession, local government pensions could cover 81 percent of
their liabilities. That ratio dropped to 72 percent in 2011. In
comparison, state-administered plans had funded ratios of 87
percent in 2007 and only 76 percent in 2011.
While local governments had fewer pension assets to cover
liabilities, they also were better about making annual
contributions. Actuaries determine how much a government should
put into its pension system each year to be able to cover
benefits stretching into the future.
Before the recession, many states had failed to pay the full
suggested amounts, and they dropped off even more as the
recession caused their revenues to plummet.
The center found local governments were better at making the
contributions, but they tended to invest the money
conservatively. Investment returns make up the lion's share of
pension plan revenues.
"State-administered plans have experienced higher investment
returns over the long haul than locally administered plans," the
study found, and that has compensated for states' lower
"In the last few years, however, the pattern of investment
returns has reversed; locally administered plans outperformed
state-administered plans from 2007 to 2010," it continued,
noting that has "shrunk the funding gap between
state-administered and locally administered plans from 6
percentage points to 4 percentage points."
International stocks and alternative investments helped
propel public pension plans with assets of $5 billion or more to
post a median return of 2.45 percent in the fourth quarter of
2012, according to a report Wilshire Associates released on
Those with assets of less than $1 billion in assets only had
a median return of 1.71 percent, largely because they did not
have the resources to diversify their investments' asset