Pamela MacLean
RedwoodAge.com

The good news for public pension funds is the rise in stock prices since the 2009 low has eased unfunded liabilities.  The bad news? The drop in state and local revenues, coupled with increased spending pressure on safety net programs, has caused government employers to cut pension contributions.

An examination of 126 public pension plans by Boston University's Center for Retirement Research showed in May the ratio of assets to liabilities dropped from 79 percent to 77 in 2010, or to about $2.7 trillion in actuarial assets, compared to $3.5 trillion in liabilities.

That 77 percent is down from a high of 103 percent level in 2000 just before the stock market's tech bubble burst.  But even this new low may be too rosy a picture, according to the center's assessment. 

The report points out that valuations achieved by estimating long-term yields on pension assets at roughly 8 percent, while most economists suggest a 5 percent rate is more realistic.

Using 5 percent as a gauge, the funded ratio drops from 77 percent to 51 percent.  By itself this suggests a pattern of growing funding problems down the road.

The study notes that funding rates vary widely, with most of the poorly funded pensions centering in relatively small plans, although there were exceptions.  The Illinois and Connecticut teachers and universities pensions are large, yet funded below 60 percent, according to the survey.

The worsening economy pushed down tax revenues and increased the demand for social services for the growing number of jobless people.  This put pressure on states and local governments to scrimp on pension contributions. While that will be painful to many public employees now, it helps to assure the long-term survival of their pension plans.

Lower Liability
But the study found that numerous state and local governments have made changes that will slow the growth of liabilities. Initially, the revenue drops prompted salary freezes and the lay off of workers.  The impact isn't immediate but it does lower the projected rate of increase in wages.  A 1 percent cut in wage growth cuts pension liability 2 percent, according to the analysis.

Of course, cutting worker pay and lay offs meet tough resistance. In January, New York Gov. Andrew Cuomo proposed a one-year pay freeze for state workers but had to negotiate with unions to get it passed.  Meanwhile, in Maine and Nevada state workers battled plans to impose pay freezes.

Twenty states have also increased the retirement age for new employees, which slows the growth of liability.  And a few states have cut cost-of-living increases for current retirees.  That's a risky proposition because it has spawned lawsuits and the legality of the changes is unclear.

Some states have asked employees to kick in more toward for their share of the pension contribution. This cuts the shortfall.

Ultimately, the combined moves of worker lay offs, salary freezes, lower cost-of-living payments and reduced benefits for future workers will serve to ease the crisis for those states and local governments that move quickly, the report concluded.