* The pension fund holds much more of its money in cash than other comparable state pension funds and more than its allocation policy suggests. State Treasurer Dale Folwell routinely overrides the policy to prevent “rebalancing.” * Folwell emphasizes steeling the pension plan against stock market downturns. That’s led to the plan missing out on the big stock market gains of the last few years. Returns for the state pension fund are far lower than comparable public pension funds. * Folwell repeatedly liquidated stock to shift money to bonds and cash. *He has lowered the pension fund’s assumed rate of return in stages, which means the state and local governments have had to increase their contributions.
Rates reflect all known announced rates as of July 2022. The footnotes at the bottom of the page, which reflect additional explanations, qualifications, and scheduled future developments for certain plans, are a critical component of this data set.
The average investment return rate assumption for U.S. public pension funds has fallen below 7.0%, to its lowest level in more than 40 years, according to the National Association of State Retirement Administrators.
Among the 131 funds that NASRA measured, more than half have reduced their investment return assumption since fiscal year 2020 as rising interest rates and other factors have contributed to more volatile investment returns.
For the 30‐year period that ended in 2020, public pension funds accrued approximately $8.5 trillion in revenue, according to NASRA, of which $5.1 trillion, or 60%, came from investment earnings. Employer contributions accounted for $2.4 trillion, or 28%, and employee contributions totaled $1 trillion, or 12%.
An adjustment of the assumed rate of return down to 7.0% means the plan will recalculate pension debt upwards in 2023, but will also be better positioned to avoid future debt growth over the longer run. The forecast in Figure 2 compares the growth of TRS’ unfunded liabilities under three scenarios:
Returns meet TRS assumptions;
TRS experiences two major recessions over the next 30 years;
And, TRS makes actuarially determined contributions (also using the two-recession scenario).
With this actuarial modeling of the system, it is clear that statutorily limited contributions will continue to pose funding risks for TRS that will be borne by Texas taxpayers. A proposed 7.0% assumed return will readjust 2023 unfunded liabilities upwards by $6.5 billion, but the plan will suffer fewer investment losses over the next 30 years when the plan inevitably experiences returns that diverge from expectations. TRS’ unfunded liabilities will remain elevated under the rigid statutorily-set contributions. If, however, TRS was to transition to Actuarially Determined Employer Contributions (ADEC) each year, then even by recognizing higher 2023 debt (under a 7.0% assumption) TRS could shave billions off its unfunded liabilities by 2052 ($74.7 billion down from $81.3 billion with current 7.25% assumption).
State retirement systems in America are still Fragile.
Despite state and local plans reporting disappointing preliminary investment returns averaging -10.4% in 2022 , there has been a net positive funded ratio trend on net over the past three years.
Funded status in 2022 for state and local retirement systems has declined considerably from last year, the sharpest single-year decline since the Great Recession and financial crisis. Investment return volatility is contributing to some significant swings in funded levels, which has been compounded by rising inflation and geopolitical turmoil.
TRS currently uses a 7.25% assumed rate of return, which is on the higher end of investment return assumptions among major public systems.
The national average expected rate of return has fallen to 7.0% over the years, with major plans like CalPERS now lowering assumptions into the 6-7% range.
Despite SB12 (2019), with investment returns expected to underperform over the next decade relative to expectations, capping contribution rates in statute creates the perfect conditions for unfunded liabilities to keep accruing just as they have since 2001.
A new study published by Pioneer Institute finds that issuing pension obligation bonds (POBs) to refinance $360 million of the MBTA Retirement Fund’s (MBTARF’s) $1.3 billion unfunded pension liability would only compound the T’s already serious financial risks.
With POBs, government entities deposit revenues from bond sales into their pension funds and use the money to make investments they hope will deliver returns that outpace borrowing costs.
“Virtually every study of POBs finds that timing and duration of the bond issues are critical,” said E.J. McMahon, author of “Rolling the Retirement Dice.” “Bonds floated at the end of a bull market are the most likely to lose money, and that makes this idea a wrong turn at the worst possible time.”
If investments don’t meet a pension fund’s assumed rate of return, it could be left with debt service costs in addition to the pre-existing unfunded liability. In 2015, the Government Finance Officers Association bluntly warned that “State and local governments should not issue POBs.” It reaffirmed its guidance last year.
Pension systems said earnings on investments accounted for 68% of overall pension revenues in their most recent fiscal year. Employer contributions made up 23% of revenues, and employee contributions totaled 8%.
The Covid-19 pandemic accelerated efforts by public pension systems to expand their communications capabilities. In all, 78% offered live web conferences to members during 2021, up from 54% a year earlier.
Pension funds that participated in the survey in 2020 and 2021 reported that their funded levels rose to 72.3%, from 71.7%. Overall, pension funds reported a funded level of 74.7% for 2021. While funded levels are not as important to pensions’ sustainability as steady contributions are, the trend is positive.
The inflation assumption for the funds’ most recent fiscal year remained steady at 2.7%. These assumptions were in place in the midst of an acceleration in the rate of inflation, which reached 7% at the end of 2021, from 1.4% a year earlier, as reported by the Bureau of Labor Statistics.
The combined total of the required Fiscal Year 2023 State contribution for the six retirement systems was $10.97 billion, an increase of $0.14 billion over the previous year. Cheiron verified the arithmetic calculations made by the systems’ actuaries to develop the required State contribution and reviewed the assumptions on which it was based.
The Illinois Pension Code (for TRS, SURS, SERS, JRS, and GARS) establishes a method that does not adequately fund the systems, back loading contributions and targeting the accumulation of assets equal to 90% of the actuarial liability in the year 2045. This contribution level does not conform to generally accepted actuarial principles and practices. Generally accepted actuarial funding methods target the accumulation of assets equal to 100% of the actuarial liability, not 90%.
According to the systems’ 2021 actuarial valuation reports, the funded ratio of the retirement systems ranged from 47.5% (CTPF) to 19.3% (GARS), based on the actuarial value of assets as a ratio to the actuarial liability. If there is a significant market downturn, the unfunded actuarial liability and the required State contribution rate could both increase significantly, putting the sustainability of the systems further into question.
Author(s): Frank J. Mautino
Publication Date: 22 Dec 2021
Publication Site: Office of the Auditor General, State of Illinois
The spike in Milwaukee’s annual pension contribution will be one of the top challenges facing the next mayor — and he or she won’t have much time in office before big decisions must be made.
Next year, current estimates predict the city’s annual pension contribution will increase from about $71 million to about $130 million, according to the city budget office. It is expected to remain elevated for years to come.
The projected increase is driven by factors including a drop in the anticipated future earnings on the city’s pension fund, from 8.24% to 7.5%.
Despite a 32% investment return in the last fiscal year, Marin County’s public pension fund is playing it safe.
The board of the Marin County Employees’ Retirement Association decided to factor in the extraordinary gain over four years rather than immediately when assigning annual employer contributions.
The association includes Marin County and eight other public entities. Its net investment return was $829.8 million for the fiscal year that ended June 30.
Last year, when the association’s board voted to cut the fund’s assumed annual rate of return from 7% to 6.75%, Block advocated reducing it to 6%. At that time, the association also lowered its assumed annual rate of inflation from 2.75% to 2.5%.
The Cheiron actuaries, however, said the association’s assumptions regarding inflation and the annual rate of return remain valid.