Funding for U.S. state retirement plans fell for a fourth straight year as insufficient contributions and inadequate investment gains overwhelmed cuts that more than 40 legislatures have made to benefits since 2007.
The median funding ratio was 71.7 percent for the year through June 2011, down from 74.3 percent the prior period, data compiled by Bloomberg show. Taxpayers in Illinois, the weakest of the group for the fourth straight year at 43.4 percent, are paying the price: the relative borrowing cost of the state and its localities is almost double the five-year average.
More than 30 states, including New Jersey and California, had less than 80 percent of assets needed to meet obligations to workers and retirees, the data show. That left them short of the threshold for sustainability of their plans.
“A lot of the states have done the easiest stuff first,” Christopher Mier, chief municipal strategist at Loop Capital Markets in Chicago, said regarding benefit cuts. “From there it gets progressively more difficult.”
The funding drop shows the challenge states face trying to recover from investment losses suffered during the recession that ended more than three years ago. The Standard & Poor’s 500 Index (SPX) sank 38.5 percent in 2008, the most since 1937.
Lawmakers have lifted retirement ages, forced workers to contribute more to plans and suspended cost-of-living increases. Yet more than 30 states still failed to deposit enough into their systems last year as they struggled to balance budgets, according to Mier.
“If they had been diligently making their contributions there wouldn’t have been this crisis,” said David Draine, a senior researcher in Washington at the Pew Center on the States. “It’s the states that came into the recession with poorly funded plans and a history of failing to make sufficient contributions that were already in a very vulnerable spot.”
Estimates of states’ combined pension deficit have ranged from $1 trillion to as much as $4 trillion as lawmakers and regulators debate the appropriate rate for discounting liabilities. The Governmental Accounting Standards Board has adopted new rules for next year that could swell the gaps.
Funding levels are falling as lawmakers cave to pressure to lower assumed rates of return amid volatility in performance.
New York, which has consistently made its actuarially required payments, had less than 100 percent of the assets it needed in 2011 after lowering its rate to 7.5 percent from 8 percent, Bloomberg data show.
The board of the California Public Employees’ Retirement System, the largest public pension fund with $244 billion of assets, voted in March to cut its rate to 7.5 percent from 7.75 percent. The fund earned 1 percent in the year ended June 30, after gaining 21 percent the year before.
California Governor Jerry Brown, a Democrat, last month signed the broadest rollback of public-employee pension benefits in the history of the most-populous state. The changes may save taxpayers as much as $55 billion over 30 years by requiring new employees to pay half the cost of benefits and work longer before retiring. The state’s funding ratio was 78.4 percent, down from 80.7 percent.
While corporate plans have been cutting equities in favor of fixed-income, public funds have done the opposite. They’ve increased stocks to nearly 70 percent of portfolios on average over the last decade as they seek higher returns, according to the Center for Retirement Research at Boston College. State systems are also boosting stakes in alternatives such as hedge funds, Cliffwater LLC, an investment advisory firm with offices in New York and Los Angeles, said in a June report.
“They are essentially doubling down to earn their way out of this problem and it’s not working,” said Kimberlee Lisella, vice president of customized strategies at Cutwater Asset Management Corp. in Armonk, New York, which oversees $32 billion. “These strategies have had mediocre returns at best and the volatility has been off the charts.”
Illinois lawmakers in August failed to act on a cost- cutting pension overhaul, ending a one-day legislative session called by Democratic Governor Pat Quinn.
The Democratic-controlled legislature considered increasing employee contributions, passing some costs to local school districts, and forcing workers to choose between the current system and receiving free retirement health care. None won majority support.
Standard & Poor’s in August cut Illinois’s rating one step to A, sixth-highest, citing “weak pension funding levels and lack of action on reform measures.” New Jersey had its grade dropped by the three major credit raters last year, in part because of its unfunded retirement liability.
Investors demand about 1.5 percentage points of extra yield to own 10-year general-obligation bonds from Illinois issuers rather than AAA securities, compared with a five-year average of 0.88 percentage point, data compiled by Bloomberg show.
California, at A-, is the only state whose grade is lower from S&P.
“We all look like idiots,” Representative Daniel Biss, an Evanston, Illinois, Democrat, said in a speech in August as the House failed to advance a bill that would have eliminated the legislature’s own pension plan, one of five the state manages. “Not the governor, not the other side, not our side -- we all look like idiots.”
Rhode Island, with an unfunded ratio of about 62 percent, passed one of the most ambitious retirement-system overhauls last year, as the Democratic-controlled legislature defied union opposition. Yet the law, which suspended cost-of-living increases and raised retirement ages, is among the handful being challenged by employees and retirees in court.
Lawmakers “were reckless in the way that they failed to fund the plans, and now they’re being equally reckless in the way they’re going to fix them,” said Steven Kreisberg, director of collective bargaining for the American Federation of State, County and Municipal Employees in Washington. “This is an example of politicians at their worst.”
In muni trading yesterday, the yield on 10-year AAAs fell 0.02 percentage point to 1.69 percent, the lowest since early August. It dropped to 1.63 percent July 27, the lowest since at least January 2009, data compiled by Bloomberg show.
Following are pending sales:
NASSAU COUNTY INTERIM FINANCE AUTHORITY, which oversees the finances of the Long Island, New York, municipality, plans to sell about $313 million in refunding bonds as soon as today, data compiled by Bloomberg show. The debt, backed by the county’s share of local sales-tax revenue, has a AAA rating from S&P. (Added Oct. 3)
GUAM POWER AUTHORITY is set to sell $354 million of revenue bonds as soon as this week, data compiled by Bloomberg show. The sale will refund debt and will be enhanced with bond insurance, according to offering documents. (Updated Oct. 1)
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