Strong gains in the stock market last year will do little to ease the crushing pension debt strangling municipal budgets nationwide.
Continue Reading Below
The latest report from Moody’s Investors Service, "Lower Liabilities, Higher Costs: Pensions Still Weigh On U.S. Local Governments in 2014," says rising interest rates and strong returns have lowered public pension liabilities but costs will remain elevated.
“Contribution requirements for pensions will remain high and trending upward in most cases, including large statewide systems in California” according to Moody’s analyst and report author Tom Aaron.
The report blames a “substantial unfunded liability buildup” over the last ten years. To make matters worse, “Cost growth is exacerbated where contributions perennially fall short of actuarial requirements,” or simply put, municipal governments failed to make the minimum payments their actuaries told them to make to avoid today’s funding problems and last year’s strong returns won’t close the gap.
The report acknowledges better-than-assumed investment performance in 2013 is reducing pension liabilities. But the better-than-expected performance last year followed worse-than-expected performance in 2012. For instance, the California Public Employees Retirement System (CalPers) assumed a rate of return in 2012 and 2013 of 7.5%. The actual rate of return in 2013 was 12.5%. But in 2012 the actual rate of return was a paltry 0.1%.
“A year of better-than-expected investment performance helps improve pension funding, but investment returns are only one of several key parts of pension funding," Aaron told FOX Business. "Unfunded pension liabilities remain much higher than in years past due to the cumulative damage of prior years’ investment losses and, in many cases, a failure to adequately pre-fund promised benefits.”
Continue Reading Below
The report calls the growth of unfunded pension liabilities between 2003 and 2012 “substantial.” Among the nation's four largest public pension plans, that unfunded liability grew from $34 billion to $174 billion over ten years. Moody’s said it would take multiple years of better-than-expected returns to reduce the rising liabilities and concurring costs.