Low interest rates are one of several factors that contribute to higher levels of unfunded pension obligations in state and county pension plans across the country.
The California Public Employees Retirement System (CalPERS), the largest public pension plan in the U.S. With a total of 1.8 million members covered by 3,000 employers, reported a net return on investments of 0.6 percent for the 12-month period ending June 30, 2016.
The California State Teacher Retirement System (CalSTRS), which administers retirement funds for California’s 896,000 public school educators from 1,700 school districts, reported a net return of 1.4 percent for the 2015-16 fiscal year that ended on June 30, 2016.
Both California funds have a target annual return of 7.5 percent. CalPERS and CalSTRS had $ 62 billion and $ 74 billion in unfunded liabilities, respectively, as of fiscal year 2013, according to the California Public Policy Institute. CalSTRS now claims it is on track to achieve full funding by 2046.
The New York State and Local Retirement System reported an average rate of return of 0.2 percent for the fiscal year on March 31, 2016, compared to its stated goal of 7 percent.
The Oregon Public Employees Retirement System (PERS) reported an investment return of 2 percent in 2015, compared to its target of 7.75 percent, resulting in a liability increase of $ 3 billion. .
An average rate of return of 7.7 percent is now the goal set by most state and county pension funds nationwide, according to a 2015 report from the National Association of State Retirement Administrators. The Boston College Retirement Research Center estimates that every 1 percent decrease in return on investments results in a 12 percent increase in liabilities.
The inability of state and municipal pension plans to adequately fund current liabilities at the same time as rates of return are falling is causing significant underfunding. The situation is putting pressure on public pension administrators and elected officials across the country.
The new accounting standards for public pensions are also paying more attention to underfunded municipal liabilities. The Government Accounting Standards Board issued GASB Statement No. 67, Financial information for pension plans, and No. 68, Accounting and financial information for pensions in recent years. The new reporting standards for government-administered pension plans went into effect for reporting periods after June 15, 2013 under Statement No. 67, while the new reporting standards for employers followed a year later. under Declaration No. 68.
The Pew Charitable Trust reports that, as of 2013, states owed nearly $ 1 trillion in unfunded pension benefits, as well as $ 587 billion in unfunded retiree health care liabilities. Viewed another way, Wilshire Consulting estimates that state pension obligations are only 75 percent funded as of 2013, even though most states strive to maintain a funding level of 80 percent.
The state of Illinois alone has $ 101 billion in unfunded pension obligations and $ 56.4 billion in unfunded retiree health care benefits, according to The Pew Charitable Trust. Illinois is listed by the Trust with the third highest level of debt and unfunded retirement costs as part of the state’s personal income (after Alaska and Hawaii) as of 2013. In June 2016, Moody’s Investors Service downgraded the credit rating of some of the general obligation bonds to Baa2, down from Baa1, which is two units from the junk bond status.
The City of Chicago is struggling with its own pension challenges. The City’s Municipal Employees Benefits and Annuities Fund, which covers 70,000 workers, reported that unfunded pension liabilities more than doubled to $ 18.6 billion at the end of 2015 from $ 7.1 billion a year earlier. Moody’s downgraded the city’s credit rating to junk bond status in 2015.
Municipalities are responding with a wide range of measures to increase pension funding, reduce benefits and cut expenses. Representative actions include the following.
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Chicago implemented a property tax increase in 2015 to better fund police and lay off retirement funds. The mayor is also seeking an increase in water and sewer taxes as a means to support municipal retirement benefits.
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Pennsylvania officials are evaluating a variety of changes to pension plans, including the possible adoption of less expensive 401 (k)-style plans.
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Connecticut now dedicates 10% of its budget to unfunded pension obligations, which doubled in the last decade.
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Oregon plans to increase pension funding rates, which will likely translate into spending cuts like teacher layoffs, larger classes, and public safety cuts.
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Detroit’s municipal bankruptcy was resolved, in part, with 4.5 percent pension cuts approved by certain retirees. Benefit reductions were also seen in the areas of cost-of-living and healthcare cost adjustments.
Pension fund litigation is a certainty
As states and municipalities struggle to fund pension obligations in a low interest rate environment, court battles in New Jersey, Illinois, California and Michigan may serve as a precedent for similar challenges likely to unfold across the country.
