(Bloomberg) — U.S. state pension plans are strengthening for the first time in six years as rising contributions and rallying stocks ease a fiscal strain that’s vexed municipal leaders since the recession.
The median state system last year had 69.3 percent of the assets needed to meet promised benefits, up from 68.7 percent in 2012, according to data compiled by Bloomberg. It was the first increase since the start of the 18-month recession that ravaged retirement assets and led some officials to skip payments as tax revenue sank. Illinois and New Jersey, with the weakest state credit ratings, saw funding levels set new lows for the period.
Buoyed as the Standard & Poor’s 500 index set record highs, the nation’s 100 largest public pensions earned about $448 billion in 2013, the most in at least five years, Census data shows. At the same time, governments added a record $95 billion to their plans as they socked away rebounding tax revenue toward obligations to retirees.
“States are playing catch-up — you see more discipline and more public acknowledgment that plans have got to make the required payment every year,” said Eileen Norcross, senior research fellow at George Mason University’s Mercatus Center in Arlington, Virginia.
The stabilization in pension-funding gaps marks an encouraging sign for states and municipalities, potentially providing officials with more breathing room to allocate budgetary resources toward services and infrastructure as well as retiree benefits.
They had less leeway in the aftermath of the financial crisis, when local governments shortchanged pension contributions by the most in at least a decade, exacerbating the level of underfunding, according to data from the Center for Retirement Research at Boston College.
The Bloomberg data for 2013, the latest available, underscore the findings in a June report from S&P that said funding levels “have likely bottomed out” and are poised to improve along with climbing stocks.
The S&P 500 index rose almost 30 percent last year, the most since 1997, propping up the pensions as the Federal Reserve’s policy of keeping its benchmark interest rate close to zero suppresses debt yields.
“Things are getting better on the investment side,” said John Flahive, Boston-based director of fixed income at BNY Mellon Wealth Management, which oversees about $20 billion in munis. “It would be nice to have good consistent performance from the equity side plus rates that are closer to the historical norm.”
While retirement plans from Ohio to Oregon rebounded, those with some of the worst funding levels deteriorated.
Illinois, with an A3 Moody’s Investors Service grade that’s four steps above junk, has 39.3 percent of assets needed to cover projected obligations, down from 40.4 percent in 2012 and again the least of all states, Bloomberg’s data shows. New Jersey’s ratio fell to 64.5 percent from 67.5 percent.
The two states are examples of “really dire” situations, Norcross said. “The fact that they have systematically underfunded for so long means they have a hole that’s going to be almost impossible to fill with the tools at their disposal.”
Illinois, led by Governor Pat Quinn, a Democrat running for re-election, made 84 percent of full contributions in 2013, better than the 80.7 percent average, according to a report from Loop Capital Markets. By contrast, New Jersey made 28 percent of the actuarially required payment, the worst in the nation.