June 10, 2014 / 7:57 PM / in 4 years

Stocks boost U.S. public pensions despite accounting reform: study

WASHINGTON (Reuters) - A rising stock market will cause most U.S. public pensions to achieve healthy funding levels this year, even as they adapt to an overhaul on accounting for investments, according to a survey from the Center for Retirement Research at Boston College released on Tuesday.

Up until this year, almost all public pensions “smoothed” their assets’ values across a short span of years. That meant the losses they suffered in 2008 from the financial crisis, pummeling their biggest source of revenue - returns on equities - affected their funding levels through 2013.

Last year, the 150 plans Boston College surveyed had enough assets in total to cover 72 percent of their liabilities, the same as 2012. The ratio first dipped below 80 percent, considered the threshold for a financially healthy plan, in 2009.

The Governmental Accounting Standards Board has ended the process of smoothing starting this year. Under the old methods, plans’ funded status would have likely risen to 75.2 percent as the losses from the crisis finally fell out of the calculations, and then probably climbed 77.4 percent the following year.

Under the new standards taking effect this month, though, many plans will appear to be in even better shape. Recent gains in the stock market will register at once, bringing the baseline funded ratio up to 80.6 percent in 2014 and possibly 81.6 percent in 2015, the survey found, projecting the investments’ performance using the Dow Jones Wilshire 500 Index.

Public pensions ended 2013 with the highest assets on record, according to the U.S. Census.

“Regardless of the measurement standard, a continued healthy stock market will improve the funding picture in 2014. What happens thereafter depends very much on the performance of the stock market and the extent to which plans adjust their discount rates,” according to the survey.

There is a hitch. If a public pension is deemed “underfunded,” it will have to reduce its projected rate of return to one GASB considers “riskless.” When applying this rate to all the sample pensions, Boston estimated the funded ratio would be 69.5 percent this year and 70.4 percent next.

Last week, the Federal Reserve reported public pensions had a funding gap of $1.372 trillion in the first quarter. With benefit entitlements totaling $5.034 trillion, pensions were 72.7 percent funded. Just a year earlier, in the first quarter of 2013, pensions were only 69 percent funded, according to the Federal Reserve data.

Still, each state has a unique retirement system for public employees and the plans’ financial health can vary greatly. For fiscal 2013, which for most public pensions ended June 30, 2013, 6 percent of the plans surveyed had enough assets to cover more than 100 percent of their liabilities and 27 percent of plans could cover 80 percent to 99 percent, Boston College found.

Reporting By Lisa Lambert; Editing by Jonathan Oatis

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