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 well situated 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.
The regulatory environment for public pension plans differs from that of private-sector defined benefit plans in that states and local jurisdictions are exempt from the Employee Retirement Income Security Act, which covers a wide range of employee benefit plans.
For example, federal laws require a higher funding-ratio level for private-sector pension plans to demonstrate that they are adequately funded.
The Government Accounting Standards Board allows state and local pension plans to eliminate their unfunded liabilities within 30 years.
Industry watchers said that it is too soon to predict if and how the reported $600 billion to $1.6 trillion in unfunded liabilities for retiree health benefits faced by state and local municipalities will affect long-term funding of pension plans.
Research asserting that state and local pension systems are, overall, financially healthy comes as officials in Atlanta, Philadelphia, New Jersey, and other local governments have publicly acknowledged that the economic crisis will create huge deficits in their pension plan funds.
Some observers have argued that any new economic stimulus package needs to include funding for distressed public pension plans.
However, Ms. Kellar said the public and media should not frame these public declarations for help as meaning the nation's public pension system is in trouble.
Some governments face unique circumstances, such as a rapid increase in police officers and firefighters retiring early, a high concentration of poverty and a substantial loss of economic base, which means their funding levels have deteriorated, she said.
"To look at a particular community's issues and assume that it applies to other local governments is a mistake. Some local municipalities are in the exception category, as opposed to the norm," Ms. Kellar said.
Successfully managing a public pension plan requires taking a long-term approach to funding and sticking to your annual required contributions, "presuming that you have the underlying strength in your state or locality to make those payments," Ms. Kellar said. "Over time, we know this works."