State and local pension funds continued to recover this spring from the depths of the Great Recession as their gains from investments and from higher annual taxpayer contributions lifted their holdings to their highest levels in three years, the Census Bureau reported Thursday.
The assets for the nation’s 100-largest public-employee pensions systems rose more than 1 percent during the second quarter, to $2.8 trillion, the Census Bureau said. The increase contributed to a nearly 18 percent gain in holdings over the previous year.
The recent retirement fund growth resulted from overall investment gains as well as pension reforms enacted in more than 40 states and many local governments since 2009.
The reforms have required state and local governments and workers to pay more into the pension funds while trimming promised benefits to employees and, in a few cases, current retirees. In many places, the changes have sparked controversy and protests.
The pension gains reported by the bureau did not account for the recent turmoil in the stock market, which has resulted in the Dow Jones industrial average, a key market indicator, declining by more than 10 percent since July.
Still, pension fund managers saw the report as good news. They said it underscores their view that though some pensions systems face dire funding problems, most should be able to recover without consuming large chunks of taxpayer money or gutting promised benefits to government workers.
“This report helps reinforce the analogy that funding a pension is akin to paying off a mortgage. Namely, the liabilities are not all due at one time and become due . . . in the future,” said Keith Brainard, research director at the National Association of State Retirement Administrators.
The recent rises in pension system values have moved the funds closer to their 2007 peak of $2.93 trillion. The financial crisis and recession caused holdings to decline to $2.1 trillion in the first quarter of 2009, and pension funds have been recovering since.
The plunge brought increased scrutiny to the long-term funding practices used by the nation’s public retirement systems. Researchers estimate that the plans face a funding gap of $600 billion to $3 trillion — depending on the accounting method used.
Although public pensions typically assume robust gains on their investments, some critics say they should plan for much lower returns, given the volatility of the financial markets over the past decade.
Others, however, say that states can afford to be more aggressive in their estimations of what they will make because they cannot file for bankruptcy and municipalities rarely do.
Beyond the unfunded pension liabilities, states and municipalities are burdened by soaring retiree health-care costs, which total hundreds of billions of dollars and are typically funded directly out of annual budgets.
Public pensions are paid for by a combination of taxpayer dollars, employee contributions and investment returns. But as the population has aged and investment markets have crashed during the financial crisis, the cost of benefits has begun to overwhelm some funds. That has left public officials faced with either cutting benefits or pouring more taxpayer money into pension funds, even as the economy’s struggles continue to raise demand for government services while pinching tax revenue.
The funding problems have ignited seismic political battles, as governors in several states have moved to curb the benefits paid to public employees. In some states, including Wisconsin and Ohio, Republican governors have curtailed the collective-bargaining rights of public employees, calling the move necessary to rein in soaring employee benefit costs.
Union leaders say the new report offers proof that radical solutions are not needed to return pension systems to fiscal health.
The report “once again demonstrates the resiliency of our defined benefit pension systems. We still have a great deal of work ahead of us as we try to rebound from the devastating losses in assets due to Wall Street’s reckless behavior,” said Gerald W. McEntee, president of the American Federation of State, County and Municipal Employees. “This report indicates that those claiming the pension sky is falling are trying to promote their radical anti-worker agenda rather than the protection of taxpayers’ interests.”