State Pension Funding

Moody’s released a report last week detailing their findings on pension funding, including nationwide average funding levels after adopting a new formula for calculating the funding ratio.  The new formula is intended to increase transparency and comparability across all the various plans and uses a market-based discount rate.  However, under the new methodology the average funding ratio drops to 48% from 74%.  One of the issues is that, over the last several years many states have used “underfunding,” or contributing less for an annual budget period than what was actuarially recommended as a tactic for balancing their budgets.  The other major contributor to this drop is one which we have discussed in the past; using a market based discount rate is more accurate, but given the current low interest rate environment, a lower number and a lower discount rate assumption means a higher number for the present value of future liabilities.  We believe that this is a step in the right direction from Moody’s and hope that it will continue to put pressure on states to take funding pensions seriously (or reforming the obligations).  Credits we like to buy for our client accounts have maintained contributions throughout the economic downturn, have contributed greater amounts than actually required, and/or have made some type of reform to the benefit system in order to move toward a fully funded pension system.