State Budget Solutions, a nonpartisan nonprofit with the mission of reforming governments’ approach to budgeting, recently released a report on state pension liabilities that shows large liabilities for state government pensions. The report uses a dramatically different basis for expected growth in invested assets — pinning them to the current 15-year Treasury bond yield of 3.2 percent, a “far more conservative rate of return than the 7-to-8-percent over 20 or 30 years commonly used by most governments in their financial reports,” according to Governing magazine. By assuming very modest growth in long-term investments, the report concludes that all public systems are massively underfunded.
The report, using this different approach to calculate expected asset growth, then concludes that state systems’ funded ratios (a mark of the health of their pension funds) are between 24% and 57%. According to the report, Maryland falls somewhere in the middle, with a 34% funded ratio through that analysis. By contrast, when employing its more conventional market-based rate of return assumptions to project asset growth, the 2012 Comprehensive Annual Financial Report of the Maryland State Retirement and Pension System put the funded ratio around 64%, stating, “The System’s funded ratio decreased from 64.7% at June 30, 2011 to 64.4% at June 30, 2012.” This Spring, however, the State Pension Board decided to lower its predicted rate of return from 7.75% to 7.55%, which will affect future funded ratio calculations.
The report references new standards that GASB and Moody’s will be using this year, stating,
With their rejection of an unsatisfactory approach to calculating public pension liabilities, GASB and Moody’s have joined a chorus of financial economists and other observers warning that pension funding practices are dangerous for both taxpayers and public employees alike. Despite this progress, many discordant perspectives remain on the true size of these funding gaps.