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WATCHBLOG: Muni pension system lowers expectations

By   /   December 11, 2012  /   No Comments

By Eric Boehm | PA Independent

HARRISBURG – Nearly 1,000 municipal pension plans saw their liabilities jump by about 10 percent last week as the state agency that oversees those plans adjusted its long-term earnings expectations.

Annual returns for the Pennsylvania Municipal Retirement System (PMRS) for the last five fiscal years. Earning less than the expected rate of return causes an increase in unfunded liabilities.

The Pennsylvania Municipal Retirement System, which provides administrative support to 950 of the state’s more than 2,500 municipal pension plans, lowered its annual expected rate of return last week from 6 percent to 5.5 percent annually.  The move was a conservative one designed to reflect changing conditions of the market and give the system a better chance of being full-funded in the future by using more accurate projection, according to James Allen, Secretary of PMRS.

At present, the $1.3 billion pension system has an average funding status of 83 percent – meaning there are 83 cents of assets to cover every dollar of liabilities.

If a pension fund falls short of it’s expected rate of return, the unfunded liability will grow.  By lowering the expectations, the fund increases the chances that it will exceed the targeted return on investment and be able to use the extra growth to pay off some of that liability.

In the short term, individual municipal plans can expect to see about 10 percent growth in liabilities as a result of the change, but there will be a two-year delay before the new expectations take effect, Allen said.

For a municipal plan with $1 million in liabilities and an equal amount of assets, the change in expected earnings will result in a more realistic projection of $1.1 million in liabilities, but no increase in assets.

“The greater the unfunded liability of a particular plan, the more the change in assumed rate of return will impact future costs,” Allen said.

Collectively, Pennsylvania’s 2,500 municipal pension funds have an unfunded liability of more than $6 billion, though the amounts vary widely from place to place.

The two state pension systems – the Public School Employees Retirement System, or PSERS, and the State Employees Retirement System, or SERS – use a 7.5 percent discount rate.  The two funds have a combined unfunded liability of more than $40 billion.

Contact Boehm at [email protected] and follow @PAIndependent on Twitter.