| NEW YORK
NEW YORK Jan 21 The erosion of assets at U.S.
public pension funds since last summer is raising concerns state
and local governments will have to increase their contributions
to the funds to make up for shortfalls, leaving less for public
U.S. public pension funds count on returns of 7 percent to 8
percent a year to meet their liabilities, an ambitious target in
a low interest rate environment.
"The contributions have gone up very substantially and we
are headed toward them going up more again, creating really
politically difficult choices," said Donald Boyd, a state and
local government expert at the Nelson A. Rockefeller Institute
Two heavy bouts of selling in the last six months have hit
assets. State and local pension funds saw their unfunded
liabilities jump by $268 billion to a staggering $1.7 trillion
from June to September, according to the latest data from the
Federal Reserve. That unfunded liability amounts to 9.5 percent
of the U.S. economy, according to Boyd.
Pension funds would have made some, but not all, of that
back when markets rallied in the last quarter of 2015. Now, with
the S&P 500 down nearly 8 percent this year, those funds could
end the first quarter lower than they were in September.
Government employers will have to amortize those losses,
paying them down over the life of the fund, potentially pushing
up the amount they have to pay into the pension funds.
Contribution rates have been edging lower since they
skyrocketed after the financial crisis. Any reversal of that
trend would be a blow for local finances.
The Employees Retirement System, the largest fund in the
overall New York State retirement fund, saw contributions leap
from under 1 percent of payroll in 2000 to 20.1 percent in 2014.
The current rate is 15.5 percent.
"It's a big and continuing long-term problem that puts more
strain on state and local government finances," said Boyd.
The hit to pension funds is just one channel where market
volatility can hurt local government budgets. A collapse in oil
prices is already creating a headache for U.S. oil producing
states and stock market losses cause havoc in states that rely
heavily on capital gains tax revenues.
Pension fund administrators like to see themselves as above
the fray when it comes to market volatility, pointing to their
long-term horizons and diversified portfolios.
"We don't let short-term trends in the market dictate our
strategy. However, we do make tactical course adjustments when
the markets are less than stable and we are undertaking such
action. I cannot get into the details of those actions," said
California State Teachers' Retirement System spokesman, Ricardo
But the sheer size of pension funds' asset base - $4
trillion, according to the Federal Reserve - means that swings
in the unfunded liabilities generated by market volatility are
huge compared to the fixed tax bases that support the funds.
In a quest for higher returns in a zero interest rate
environment, money managers moved out of fixed-income toward
equity and other risky assets. Hedge fund, private equity fund
and real estate investing has left the pensions more exposed to
market gyrations. More than 70 percent of their assets are in
equities and other higher-risk investments, according to
Toronto-based research firm CEM Benchmarking.
Most funds do not publish quarterly data, but New York's
Common Retirement Fund does, giving a small window into losses
suffered across the sector. By the end of September the fund
lost $11 billion, bringing its asset base to $173.5 billion
after including the $5 billion paid out in benefits.
Because pension funds are long-term investors they smooth
returns over a five-year period. That means a few bad quarters
will not necessarily translate into high contribution rates. But
sustained weakness and slow recovery will. They can also
amortize losses over 30 years, reducing the short-term impact to
"In terms of how volatility affects contributions from
governments it's really slow moving," said Jean-Pierre Aubry, a
pension expert at the Center for Retirement Research at Boston
College. "Volatility is fine as long as it goes both ways."
(Reporting by Edward Krudy in New York; Additional reporting
Rory Carroll in San Francisco; Editing by Daniel Bases and Tom