Ratings Agencies Express Concern Over Maryland Pension Debt, But Uphold Rating


The major ratings agencies all upheld Maryland’s AAA bond rating this week.

But all three agencies expressed concern over the state’s pension debt. S&P in particular warned that pension liabilities, if not addressed, could lead to a rating downgrade in the future.

From the Maryland Reporter:

Fitch Ratings and Moody’s Investor Services call Maryland’s debt “moderate,” but Standard & Poor’s report says it is “above average.”

Moody’s said “low retirement system funded levels” represent a credit challenge for the state and “failure to adhere to plans to address low pension funded ratios” could make the rating go down.

Comptroller Peter Franchot said Wednesday he was concerned that the legislature would be tempted to cut the state’s pension contribution in order to find money for other programs.

Fitch Ratings noted, “Despite pensions being a comparative credit weakness, the state has taken multiple steps to reduce their burden and improve sustainability over time.”

S&P noted “implementation of various reforms and some improvements in funded ratios,” But it said “the state’s below-average pension funded ratios and annual contributions that do not meet the full [annual contribution] also continue to represent downside risk to the rating.”

The Fitch report can be read here.

The Moody’s report can be read here.

The S&P report can be read here.


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CalPERS Funding Ratio Jumps to 77 Percent On Back of Investment Gains


CalPERS revealed on Tuesday that its funding situation had improved in 2014; the system is now 77 percent funded, an increase of 7 percentage points from fiscal year 2012-13.

CalPERS attributed the funding increase to investment performance – the fund saw their investments return 18.4 percent last fiscal year.

More from the Sacramento Bee:

CalPERS said Tuesday its financial health improved significantly in the latest fiscal year, thanks to a strong investment gain, although the nation’s largest public pension system remains underfunded.

In its annual financial report, the California Public Employees’ Retirement System said it was 77 percent funded at the end of the fiscal year June 30. That represents a 7 percentage-point increase from a year earlier.


As for the recent jump in funding levels, “it’s safe to say it’s the investments,” said CalPERS spokesman Brad Pacheco. CalPERS earned 18.4 percent in the latest fiscal year, well above its official forecast of 7.5 percent.

Despite the improvement in finances, public pension critic Dan Pellissier said CalPERS is still struggling to deliver what he called “unsustainable benefits.”

He said CalPERS hasn’t been able to fully right itself even as investment performance strengthens, and a 77 percent funding ratio isn’t sufficient to safeguard benefits for future retirees. Without benefit cuts, taxpayers are going to have spend more, he said.

“That 23 percent that’s still unfunded represents billions of dollars that will be paid by future taxpayers,” said Pellissier, president of California Pension Reform.

As it is, CalPERS has been raising contribution rates from taxpayers in recent years, in part to help overcome the disastrous investment losses suffered during the 2008 market crash. Its most recent rate hike, approved by its governing board last April, is designed to compensate for longer life expectancies for retirees. The rate hike means the state’s annual contribution will gradually grow from $3.8 billion to $5 billion. Local governments and school districts’ rates will go up, too.

CalPERS is the largest public pension system in the United States and manages $295 billion in assets.


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Minneapolis Pension to Merge With State Plan in 2015

merge sign

The Minneapolis Employees Retirement Fund won’t exist as of January 1, 2015. That’s because the plan is merging with the Minnesota Public Employees Retirement Association (MPERA).

Reported by Pensions & Investments:

Minnesota PERA already administers the $869 million Minneapolis plan, and its assets are managed by the $80 billion Minnesota State Board of Investment, St. Paul, said Mary Most Vanek, PERA executive director.

The Minneapolis plan has been closed to new employees since 1978; since then, new employees hired by the city of Minneapolis and six other municipal governments have been participants in PERA.

The Minneapolis plan will no longer exist as of Jan. 1, Ms. Most Vanek said.

Under a pension bailout approved by the Minnesota Legislature in 2010, contributions from the city and the state were required to bring the Minneapolis pension fund to 80% funding before it could be merged into the state plan. It reached that mark in late 2014.

The pension plan was 56% funded in 2009.

The Minneapolis pension fund has received annual state contributions of $24 million since 2010, Ms. Vanek said. The annual contribution of the city of Minneapolis, as well as the six other municipal governments with retirees in MERF, totaled about $27 million.

A new contribution payment will be established after Jan. 1, Ms. Vanek said. What part of the new contribution will be paid by the state and municipalities will be negotiated and then must be enacted through state legislation, she said.

The Minneapolis Employees Retirement Fund is approximately $869 million in size; MPERA, on the other hand, is a $22 billion fund.


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Oklahoma Pension Officials Report Big Improvements in Funding, Liabilities Since 2010


Four years ago, Oklahoma’s state-level pension systems were collectively 58 percent funded. Now, their aggregate funding ratio stands at 74.4 percent, and unfunded liabilities have declined by $6.5 billion.

Pension officials reported the figures to state lawmakers on Wednesday during a House hearing.

More details from the Associated Press:

The improvements reflect the impact of legislation approved by lawmakers in recent years designed to improve the financial health of the systems, including bills passed in 2011 that increased the retirement age of some state employees and required that any retiree cost-of-living raises be fully funded, said state Rep. Randy McDaniel, R-Edmond, author of many pension overhaul bills.

“We’ve been monitoring this for several years,” McDaniel told members of the House Economic Development and Financial Services Committee. “I’m very proud of what Oklahoma has done.”

McDaniel, chairman of the committee, made the comments after officials from the Oklahoma Teachers Retirement System, the Oklahoma Public Employees Retirement System and other major retirement systems outlined their financial conditions.

In 2010, the state pension systems’ unfunded liability — the amount owed to pensioners beyond what the system can afford to pay — was more than $16 billion. The Teacher’s Retirement System was only 48 percent funded and had a $10.4 billion unfunded liability, and the Public Employees Retirement System was 66 percent funded and had $3.3 billion in unfunded liability.

At the time, officials said the pension systems threatened to place financial burdens on the state’s ability to finance road and bridge construction and other capital projects.

“The status quo was not sustainable,” McDaniel said. “Reforms were needed to ensure strength and security.”

Oklahoma’s most aggressive pension changes will be implemented next year, when new hires will be enrolled in a 401(k)-style plan instead of a defined-benefit plan.

A group of public employees are suing the state over the changes.

Mississippi PERS Reports Boost in Funding Ratio, Drop in Liabilities

Flag of Mississippi

Actuaries for the Mississippi Public Employees Retirement System (PERS) reported during a board meeting Tuesday that the system’s funding ratio had risen from 57.7 percent to 61 percent during the course of fiscal year 2013-14, which ended on June 30.

The actuaries also reported that unfunded liabilities had dropped for the first time in at least 10 years.

From the Associated Press:

With stock market gains replacing steep losses in the accounting ledger, Mississippi’s main public employee pension fund posted stronger results last year.

Actuaries reported yesterday to the board of the Public Employees Retirement System that the funding percentage — the share of future obligations covered by current assets — rose to 61 percent as of June 30 from 57.7 percent on the same date in 2013.

The unfunded accrued liability, the amount of money that the system is short of being fully funded, fell last year for the first time in at least a decade, from $15 billion to $14.4 billion.

The system now projects that at current contribution levels, it will take 29.2 years to pay off the unfunded liability, down from a 32.2-year projected repayment period in June 2013.

PERS Executive Director Pat Robertson said the improvement supports the argument that the pension system can reduce its shortfall with time.

“I think it means that as we’ve indicated in the past, that time and patience will help get us back on the right path,” she said. “Our focus is long-term and our investments on a long-term basis will sustain the plan.”

The improvement comes, in part, because the fund’s 5-year smoothing period ended in fiscal year 2013. From the Associated Press:

The improvement stems from recent stock market gains as well as the end of an accounting period covering losses from the 2008-2009 stock market meltdown.

Like most pension funds, actuaries smooth out gains and losses over five years, booking 20 percent of the gain each year. Parceling out gains and losses is meant to reduce the volatility of market returns. In the 2012-2013 year, the system booked the last of five $1.05 billion losses from the 2008-2009 stock market meltdown.

Without that drag on results, the smoothed, actuarial value of the fund went up to $22.6 billion. Without such smoothing, the fund was in reality worth $24.9 billion at June 30, aided by an 18.7 percent investment gain in the previous 12 months. The fund has now achieved above its long-term goal of 8 percent gains in four of the last five years, giving it a tail wind for actuarial purposes in coming years, even if the stock market continues its recent decline.

“Even if we had a loss this year, we have some reserves from those gains that just happened,” actuary Edward Koebel told the board.

PERS will not be decreasing contribution rates for employees or governments as a result of the funding improvement. That’s because contribution rates were frozen by the PERS board in 2012 in an effort to pay down the system’s shortfall more quickly.

PERS manages $25.4 billion in assets.

Chart: How Did Kentucky’s Pension System Become So Underfunded?

KY systems funding

Here’s a chart of the funding situations of Kentucky’s largest public pension funds as of 2012. At 27 percent funded, the KERS non-hazardous fund was considered among the unhealthiest in the country. Since 2012, its funding ratio has dipped even further. But the entire system is experiencing big shortfalls.

How did they get this way? Pension360 covered earlier today the system’s lackluster investment performance — but the state’s funding shortfall has been influence by a confluence of factors.

KY shortfall breakdownOne of the largest reasons for the shortfall is the state failing to make its actuarially-required payments into the system:

Screen shot 2014-10-22 at 1.40.56 PM

Chart credits: Pew Charitable Trusts

Longer Life Expectancy Will Lead to Spike in Liabilities In Near Future

Hundreds of pension funds across the country are struggling to rein in their liabilities, but their funding situations may soon be considered even worse. That’s because an actuarial tweak that takes into account greater life expectancy will increase the liabilities on the books of many plans. From Pensions & Investments:

The measured value of liabilities for most defined benefit plans will increase between 3% and 8% with the adoption of new mortality tables, said a report from Wilshire Consulting.

The tables, released by the Society of Actuaries in exposure draft form in February, reflect an increase in the life expectancy of Americans, resulting in increased pension plan liability values and liability durations.

For women ages 25 to 85, the liability increase ranges from 5.5% to 10.5%. For males in that age group, the increase ranges from 2.5% to 17.4%.

The tables most DB plans now use to measure pension liabilities were published by the Society of Actuaries in 2000.

Some pension plans will be affected more than others, as P&I explains:

The impact of the updated tables on a particular plan will depend on the makeup of its participants, said Jeff Leonard, managing director at Wilshire Associates Inc. and head of the actuarial services group of Wilshire Consulting, based in Pittsburgh.

Some public and corporate plans are large enough to use custom mortality table and likely will stick with them, Mr. Leonard said.

For U.S. plans that rely on the industry tables, however, the mortality assumption changes are “another nail in the coffin” and might encourage some sponsoring entities to move away from DB plans altogether, Mr. Leonard said.

These changes haven’t come out of nowhere, and they won’t go into effect right away; according to Wilshire, the new tables likely won’t affect funding ratios until 2016.


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