State’s cash-starved pension funds get a boost from Wall Street

The state’s cash-starved pension programs got a boost over the last fiscal year, earning an average of nearly 11.5 percent on their investments, Treasurer Denise L. Nappier reported.

The majority of the $2.8 billion in added market value involved pension programs for retired state employees and public school teachers. But the state also overseas the Municipal Employees Retirement Fund, which covers benefits to approximately 190,000 retired workers, primarily from city and town government service.

“This speaks to the soundness of the funds’ overall portfolio composition,” Nappier said.  “It also bears noting that the governor and General Assembly, by fully funding the annual required contribution, has given us the chance to invest that contribution and generate double-digit returns.  That growth is an essential component of the state’s strategy to reduce its unfunded pension liabilities, which should be welcome news to our pension fund beneficiaries and Connecticut’s taxpayers.”

Gov. Dannel P. Malloy launched a long-term initiative starting last fiscal year to reverse decades of under-funding of the state employees’ pension program.

State payments to this pension fund rose by $87 million, or nearly 12 percent in the first year of the governor’s program. The budget calls for them to reach nearly $1.1 billion in the current year, which would represent an increase of $282 million, or 38 percent, in the annual contribution since the effort began.

The state employees retirement system has been the weakest of the pension programs. As of the last actuarial valuation on June 30, 2012, the fund had $9.7 billion worth of assets, enough to cover just over 42 percent of its $23 billion worth of long-term obligations. This marked an all-time low in the nearly 30-year history of this fund.

Analysts typically cite 80 percent as a healthy funded ratio.

The teachers’ retirement fund has fared much better, but it was bolstered five years ago when the legislature and Gov. M. Jodi Rell agreed to put $2 billion on the state’s credit card to beef up that pension plan.

As of June 30, 2012, the teachers’ pension fund had $13.7 billion worth of assets, enough to cover 55.2 percent of its $24.9 billion in long-term liabilities.

Nappier noted late last week that the average investment return of 11.5 percent surpassed the earnings assumptions built into both major pension funds –- 8 percent for the state employees and 8.5 percent for the teachers.

But those assumptions are what investment earnings will average over the next 25 to 30 years. During such a long cycle, earnings typically will surpass assumptions on numerous occasions.

But a growing number of investment analysts and economists have charged that assumptions of 8 percent or greater – which are common among many states’ pension funds – no longer are realistic. A return averaging about half of that amount over the long-term is a better projection, given the slow growth of the national economy, many argue.

Nappier added that the overall investment earnings of about 11.5 percent stems primarily from the stock market, with domestic and international market investments returning 21.2 percent and 22.6 percent respectively.

But the state’s high yield bond fund also performed well, returning just over 8.5 percent, she said.