Reuters Money

Public sector pension funds racked up a strong rebound in assets last year, bolstering the argument of supporters that plans are healthier than critics argue.

At the end of 2010, aggregate state and local pension fund assets were up 35 percent from their quarterly trough after the market meltdown (March 31, 2009), and stood at a two-year high, according to a report issued today by the National Association of State Retirement Administrators (NASRA) and the National Council on Teacher Retirement (NCTR).

The new data underscores the argument made by the two groups — and other pension advocates — that some recent estimates overstate the unfunded liabilities of public sector plans.

“Discussions of pension funding should use these more recent figures instead of depressed asset values that are no longer accurate,” said Keith Brainard, research director for NASRA. “Out-of-date numbers create misleading impressions about the true financial condition of public pension plans and their state and local government sponsors.”

Last year’s gains are due to investment returns and changes by many plans to pension benefit levels and contribution rate structures, according to Brainard.

Defenders of public sector pensions argue that estimates of unfunded liabilities tend to ignore the outsized impact of the financial crisis and market meltdown. Economist Dean Baker of the Center for Economic and Policy Research estimates that if pensions had continued to earn on average a 4.5 percent nominal rate of return since the end of 2007, state and local pension fund assets would have been $857 billion higher at the end of the third quarter of 2010.

Experts also have debated whether to measure the long-range funding gap based on historical rate of return on portfolios, or a more conservative riskless rate of return that could be earned on safe investments such as Treasuries.

The riskless rate debate flared anew at a Congressional hearing last week on the issue.

NASRA notes in its new report that pension funds reported an aggregate 25-year rate of return of 8.8 percent at end of 2010 — much higher than indicated by riskless rate calculations.