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Pension Plans Due for a Comeback?


Calpers has shown rare signs of recovery, and other public employee pension plans may be getting some pain relief, as well. Recent statements by both Fitch and S&P confirm that average funding levels for public pensions fell by 1 percent in 2011 (the most recent year for which data is available). That is a continuation of a years-long slide, but the rate of decline is much lower, and may reverse in the near future. As Fitch notes, while many states are still grappling with significant pension liabilities, “Nearly all states are pursuing reform and remain well-positioned to address these burdens. While the positive effects of reform for most are decades away, a proactive approach to managing pension challenges is a credit positive.”

So the worst is over, right?

Well, maybe not. As both ratings agencies noted, the overall outlook is positive only if the states and municipalities can get their act together and push forward with reforms. Bloomberg reports:

Since most systems use an accounting mechanism known as “smoothing” to spread changes in assets over many years, losses related to the 2007-09 recession have persistently hurt pensions’ funded levels, they said. Recent stock market gains will likely bolster improvements, but the agencies warned that public pensions still face large obstacles, namely state budget strains, an aging population, accounting rule changes and legal challenges to reforms.

As we’ve seen in states like Illinois and California, the places where the pension problem is most crippling have the greatest difficulty in pushing through needed reforms. And the larger problem of automation reducing the ranks of the public-sector workforce poses a serious long-term challenge to all of these systems, for which nobody has yet found a solution. Pensions aren’t out of the woods just yet.

[State Capitol of Illinois image courtesy of Shutterstock]

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  • Andrew Allison

    VM recently wrote, “This is indeed good news for the fund, but these recent gains are not the lifeline Calpers (or California) needs. If QE were to continue
    forever and the S&P to keep hitting record highs,
    the fund might be able to stay afloat with double-digit returns every year. In reality, Calpers will be back where it started once the market
    comes back to earth.”
    So, which is it?

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