Public pension assets reach highest-ever level

September 24, 2013

The pension doomsayers, who claim that pensions are direly underfunded and losing ground, may be surprised to hear that public pension assets grew to their highest-ever level for the last fiscal year (ending June 30). Strong equity market returns helped propel the national median investment return to 12.4 percent. The whiff of panic about public pensions should be subsiding, except for the ongoing hot spots like Puerto Rico, Illinois and Chicago. Overall, the winds have calmed.

Reuters’ Lisa Lambert reported:

Asset values at U.S. public pension funds rose 8.4 percent in the latest fiscal year to the highest level in more than 40 years, but their costs also rose, the U.S. Census reported on Monday.

Most retirement systems ended fiscal 2013 on June 30. In the final quarter of that fiscal year the cash and securities holdings of the 100 largest public-employee pensions were $2.944 trillion, up 8.4 percent from a year earlier and the highest level since the Census began collecting pension data in 1968.

With asset values increasing, the overall pension funding-level for the 100 largest funds is improving. Reuters again:

Pensions have slowly marched back to health since holdings reached a low of $2.1 trillion in 2009. In fiscal 2013, investments finally surpassed the peak they reached in 2007 before the recession began.

The 100 largest public pensions have increased their assets by $844 billion between 2009 and 2013. Steve Foresti, managing director and head of the Investment Research Group at Wilshire Consulting, estimates that pension funds will reach a funding level for fiscal 2013 of 75 percent. This is up from 71 percent in 2012.

Although investment returns generally account for about 60 percent of annual increases in pension assets, the more interesting data relates to the contributions to the pension funds by employers and employees. From Benefits Canada:

Government contributions saw a quarter-to-quarter increase of 11.8 percent, from $20.4 billion to $22.8 billion, and a year-to-year increase of 2.3 percent, from $22.3 billion in the second quarter of last year.

Contributions from employees saw a quarter-to-quarter rise of 21.2 percent, from $9.4 billion to $11.4 billion in the second quarter of this year, and a year-to-year rise of 11.2 percent, from $10.3 billion in the second quarter of last year.

Employer and employee contributions have increased substantially. These are the two other legs of funding for pension plans. Increased contributions, tightened benefits and a higher retirement age will help provide a more stable funding base for public pensions.

More stories like this one from the Miami Herald are appearing in the press:

The North Miami Beach City Council imposed new contract terms on the city’s police union on Tuesday, after management and labor hit an impasse in negotiations.

Among the conditions imposed in the commission’s unanimous decision:

• Pension benefits for officers would decrease from 3 percent to 2 percent of working salary per year of service. Accumulated vested benefits would not be lost, however. So an officer with 10 years with the city today, who retires 10 years from now, would get 30 percent for the first 10 years plus 20 percent for the second 10 years, for a total retirement benefit equal to 50 percent of working pay.

• The new minimum retirement age for new officers would change from age 52 or 20 years of service to age 62 with 10 years of service or age 55 with 25 years of service.

• New employees will have to start contributing to health insurance premiums. Employees who take the HMO option will pay $25.12 per week for the employee only; $86.96 for a couple and $112.76 for a family plan.

• Wages will be frozen for one year with a “re-opener” in the second and third year. A re-opener means that management and the union will discuss the matter again in the future.

The deal affects 110 police officers and dispatchers represented by International Union of Police Association Local 6005.

These may be considered draconian changes, but note that the resolution passed unanimously. These changes, often challenged in court, are happening all over the U.S. The pension tide is turning. The bankruptcy cases in Stockton, San Bernardino and Detroit could bring even more substantial changes.

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