Largest US Public Pensions Now Face $2T Hole

As reported by Bloomberg News, the 25 largest U.S. public pensions face about $2 trillion in unfunded liabilities, according to Moody’s Investors Service.  As described,

“Despite the robust investment returns since 2004, annual growth in unfunded pension liabilities has outstripped these returns,” Moody’s said. “This growth is due to inadequate pension contributions, stemming from a variety of actuarial and funding practices, as well as the sheer growth of pension liabilities as benefit accruals accelerate with the passage of time, salary increases and additional years of service.”

As far as pension liabilities in Maryland, in June of 2013, the System’s unfunded liability was approximately $20.7 billion, for a funding status of 65.5%. Pension cost increases, low market returns, and low levels of funding contributed to this unfunded liability.

Some cost increases of the system can be attributed to the General Assembly’s 2002 Bridge to Excellence (“Thornton”) legislation, which led to jobs and salary increases for educators, creating additional liabilities for the pension system.  In the seven years following Thornton, state general fund expenditures for teacher pensions grew by 93%, but teacher pension costs grew by 159%.  In addition, in 2006, the General Assembly increased benefits and increased a multiplier for the Teachers’ and Employees’ pension systems, increasing liabilities by $1.9 billion.

The Maryland legislature and Governor have begun working to reduce pension costs spurred by initiatives that increased costs over the last ten years.  The General Assembly passed significant system reforms in 2011.  In 2012, the State also reduced some of its own costs for the pension system by shifting a portion of the teacher’s pension costs to county governments. Recent budgets have included provisions to reinvest savings from pension reforms towards paying down the pension’s unfunded liabilities. Prior to these reforms, the State’s “corridor” funding method maintained fixed contribution rates from year-to-year as long as the funded status for each of these systems remained in the “corridor” of 90% to 110%.

In its coverage of the Moody’s report, Bloomberg News also describes how pension commitments are impinging on other government responsibilities, such as local infrastructure, stating,

U.S. states and cities are contending with underfunded worker retirement systems. The 18-month recession that ended in June 2009 wiped out asset values and forced cuts to contributions. Now, liabilities are crowding out spending for services, roads and schools.

For more information on the current pension crisis, see the full story from Bloomberg News and these previous posts on Conduit Street, Conference Session: Maryland’s Progress Towards Pension SecurityPension System Earns 14.37% in Fiscal 2014, and State Policy Changes Boost Teacher Pension Costs. The full Moody’s report, US State and Local Government Pensions Lose Ground Despite Meeting Return Targets, is available for a fee.