Magazine article American Banker

Reports Find State, Local Pension Plans Are Sound

Magazine article American Banker

Reports Find State, Local Pension Plans Are Sound

Article excerpt

Byline: Lydell C. Bridgeford

If past is prologue, then the retirement assets and funding levels of state and local pension plans will emerge from this recession financially healthy, according to new research by pension plan analysts.

According to the National Institute on Retirement Security, about 25.8 million municipal workers and retirees depend on their pensions as a key source of retirement income.

The institute said that if the recession continues to wreak havoc on state and local pension systems, then U.S. taxpayers will have to bail out those systems.

Yet researchers at the National Institute on Retirement Security assert that fund managers overseeing public pension plans have historically been prudent investors, willing to rebalance their investment portfolios, listen to industry leaders, shy away from risky investments, and avoid conflicts of interest.

The nonprofit organization examined records from the Federal Reserve Board and Census Bureau on public pension plans from 1993 to 2005 and concluded that public pension plans tend to invest conservatively in bear and bull markets, which means their investment portfolios may be in a better position to recoup losses from the financial crisis.

"Our data suggest that public pensions followed well-established practices for prudent, long-term investing during the market plunge that occurred through 2001," said Christian Weller, a professor of public policy at the University of Massachusetts. This "is an indicator that public plans are wellsituated to recover from today's financial crisis in a manageable way."

The Center for State and Local Government Excellence and the Center for Retirement Research recently issued a joint brief reporting that 2006 data shows local pension plans, on average, had a funding ratio of 85%, while state plans had an 84% ratio.

The report also reveals that municipalities have shown discipline in keeping abreast of their benefit payouts as they accrue and in paying down their unfunded liabilities.

For example, about 70% of local governments were able to make their full annual required contributions as specified by the Government Accounting Standards Board, while 54% of the states did the same.

"Most state and local pension plans were in pretty good shape going into the downturn. To know that we went into it relatively strong nationwide is somewhat helpful," said Elizabeth Kellar, the executive director at the Center for State and Local Government Excellence, which focuses on employment practices by state and local entities. …

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