S&P: State Pension DB Funding Dips Slightly to 81.8% in Fiscal 2005

March 1, 2007 (PLANSPONSOR.com) - The funding levels for state pensions slipped slightly in fiscal 2005 to 81.8% despite solid investment returns, but are expected to stabilize and improve over the medium term if investment returns and liability growth meet expectations, according to a recent report by Standard & Poors.

The S&P report “Improved U.S. State Pension Funding Levels Could Be On The Horizon” – which measures the funding levels of state public employee retirement systems and teachers’ retirement systems – attributed the dip in funding from 83.5% in June 2004 to 81.8% for fiscal 2005 to the five-yearsmoothing of asset values used by most public funds, to investment losses in 2001 and 2002.

Funding ratios have fallen dramatically from 2000, when average levels exceeded 100%; however, the report said that in addition to optimistic investment returns for the year, funding pressure might be eased in the future because of escalations in employer contribution rates for the years 2003 and 2004.

Compared with fiscal 2000, when an average state pension fund had little or no unfunded liabilities, with the exception of certain historically weak plans, the gross underfunded actuarial accrued liabilities (UAAL) had increased to about $330 billion as of fiscal 2005 from $284 billion in 2004, the report said. The mean UAAL per capita on a state-by-state basis amounted to $1,378 in 2005, compared with $1,183 in 2004, while state debt climbed to $313.5 billion in 2005 from $288 billion in 2004.

Other post employment benefits (OPEB), or those largely attributable to retiree health care, also affect the total long term liabilities of state and local governments, especially in light of new accounting rules issued by the Government Accounting Standards Board (See GASB Unveils Proposal on Disclosure Requirements for Plans). S&P said in the report that GASB 45 does not change the nature of these pre-existing retiree health care liabilities, but will cause states, as employers, to focus on this issue and develop plans for managing these obligations under the new reporting environment, the report said.

The S&P report predicted nothing out of the ordinary set to affect pension assets and liabilities for fiscal 2007, including the uncertainty of future returns, contributions that are less than the full annual required amount, potential increasing liabilities and demographic changes.