WASHINGTON (Reuters) - 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 contributions.
“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 Monday.
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 classes.
Reporting By Lisa Lambert; Additional reporting by Jim Christie in San Francisco; Editing by M.D. Golan