Real economy effect of crisis: State retirement and health care funds in peril?

Update:  What About the Munis?  → good article:   http://wallstreetexaminer.com/blogs/winter/?p=1348

Is the current credit crisis and resulting loss of asset valuation having an impact on pensions and healthcare benefits?

Yes – see two preliminary reports below.

pew.pdf     ← The Pew Center on the States released a report in December 2007 highlighting the perilous footing of  the states’ funding of their long-term retiree benefits (both pension and nonpension).  Click through to full report.   

Volatility in the stock markets leads to shifts in funding levels for these retirement benefits which in turn signals a perilous outlook.  Twenty states have less than 80% of the funds needed to cover long term pension obligations, and some states including CT, IL, HA, KY and NH, are particularly underfunded.  As for non-pension benefits (i.e., health care), as of the end of fiscal year 2006, 5 states had funded NONE of their nonpension obligations (CA, TX, NY, FL, IL). 

reportgao07.pdf 

In September 2007, the GAO published its report entitled, State and Local Government Retiree Benefits – Fiscal Outlook for Funding and Costs (link to full report above). 

The fiscal outlook for state and local retiree benefits is in question.  This lengthy report begins at least to identify the looming problems with retiree health care and pension benefits in the public sector.  The states’ funds for these benefits depend to a significant degree on assumptions about future rates of  return on investmentsand future contributions. 

Excerpt:  

“Failure to Maintain Acceptable Funding Levels May Place Future Taxpayers and/or Beneficiaries at Risk

Public pension plan funding levels are sensitive to a variety of external influences, such as the rate of return on the funds’ investments, the annual stream of contributions to the fund, and changes to the levels of benefits that ultimately affect future liabilities. Although strategies are being used to keep the funding of most plans on track, we found some notable exceptions where the failure to use such strategies caused the funding status to drop significantly. Over time, state and local governments could be faced with the need to raise taxes, cut spending, or reduce benefits in order to meet their obligations.

As investment earnings are the major source of pension funding, timely payment of contributions is key to maximizing the compound interest earned. However, sometimes a combination of factors makes it difficult for state and local governments to make their actuarially required contribution, and funding levels can drop. For instance, the sharp and prolonged decline in the stock market that occurred in the early 2000s reduced the value of many plans’ assets and increased the amount many states and local governments needed to contribute to remain on track toward full funding. Furthermore, to the extent state and local governments experience slower economic growth, revenues might not keep up with expenditures, making it difficult for the governments to meet their funding commitments for pensions. For example, from 2001 to 2007, Michigan’s contribution rate for the State Employees’ Retirement System (MSERS) dramatically increased—from 4.7 percent to 18.1 percent of payroll. During this period of slow revenue growth, Michigan used money transferred from a pension fund subaccount to supplement the amount it contributed to MSERS to make its full actuarially required contribution.”

Page 34 GAO-07-1156

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