Shoring up local pension plans

By all accounts, public pensions have made progress with their funding obligations, although problems still persist in some jurisdictions.

For example, in Louisiana when the state’s crucial oil and gas industry bottomed out around 1983, the state lost much of its tax revenue base. “When the royalties were not there, we went a number of years when little contributions were made on behalf of state employees,” says James Wood, the manager of Louisiana’s state pension fund since 1992.

The result, according to a study performed last year by the Santa Monica, Calif-based consulting group, Wilshire Associates, was nearly a $6-billion deficit – one of the biggest in the nation.

To combat potential underfunding problems, some states have enacted laws that require their fiduciaries to adhere to actuarial advice and fund their plans accordingly. Others treat such liabilities like any other budget expense, putting in only what they can afford.

But if the problems of the few underfunded plans – those in Michigan, Massachusetts, Illinois, California and Louisiana – are not corrected, they could affect the whole pension system.

Taking action now would likely mean higher taxes and reduced services in the affected jurisdictions. But inaction is even more costly.

When Bridgeport, Conn., tried to declare bankruptcy in 1990, it said it would pay off all of its creditors, except its pension fund. Fortunately, the city stayed afloat, but a taxpayer-financed bailout is just what the states want to avoid.

To be sure, according to the Public Pension Coordinating Council, things are promising overall. Paul Zorn, author of a study released by the group, says that between 1991 and 1992 pension assets grew by 12 percent, and pension obligations increased only 10 percent. Thus, plans, on average, were 90 percent funded in 1992, up from 88 percent in 1991.

That is odd considering that the rate of return on the invested assets fell during that same period from almost 15 percent to about 10 percent, and public employers cut their contributions from about 14 percent of payroll in 1991 to around 13.5 percent in 1992, while employee contributions remained steady at roughly 6 percent of payroll.

“The results of our study should not be interpreted as saying there is no problem,” emphasizes Mr. Zorn. “The system must remain vigilant.”

Louisiana’s Wood agrees. His state’s fund, which is now at a 60 percent funding level, has been under a state constitutional mandate since 1987 to have it fully funded by the year 2029.

Wood says that the fund now follows two basic philosophies: it keeps its asset mix of stocks, bonds and money market funds relevant to today’s market trends, and it monitors its money managers to make sure that they are performing in the top half of their peers.

Jon Lukomnik, deputy comptroller for pensions for New York City, says that significantly underfunded plans should not take big risks to correct their situations.

“You don’t want to grab for return and ignore risks,” he says. (The New York State pension system has the biggest surplus in the country at more than $23 billion, according to the Wilshire study.)

Two philosophies guide New York City, says Lukomnik:

First, under no circumstance should the plan sponsor be allowed to raid the pension to support other programs, and second, all plans should have independent actuarial audits.

“Those assumptions underlie every well-funded Plan,” says Lukomnik.