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View this article on our website: Despite Failure, Most Public Pensions Safe
Despite Failure, Most Public Pensions Safe
Pensioners and investment management professionals need not worry about retirement plans going bankrupt, experts say, despite a recent event that saw a municipal pension in Alabama go belly-up.
Most believe the undoing of the Prichard, Ala. pension was a one-time event, one that is not likely to be repeated elsewhere. In the case of Prichard, which is a small community near Mobile, pension executives knew of the impending failure, yet chose to let the system fail. It is no longer paying benefits to its retirees.
“I think this [pension failing] can be a one-off,” says Keith Brainard, research director for the National Association of State Retirement Administrators. “Everything I have seen about this tells me that the city saw the warnings and didn’t take action.”
Brainard, who has also worked at the Arizona State Retirement System as a manager of budgets and planning, says most pensions have enough assets to continue paying benefits for years. “For the ones that don’t, if they haven’t taken action yet, they likely will take action [soon],” he states. “Based on my information, I don’t expect [this occurrence] to catch fire.”
Despite Brainard’s confidence in the public pension industry, there are numerous states which are facing funding challenges. One of the most glaring is Illinois, where several state-wide pension plans have had to sell off securities in recent months to make pension benefits.
For example, as of last month, the $10.4 billion Illinois State Board of Investments had pulled nearly $500 million from its long-only asset classes to pay benefits – a case that distinctly illustrates managers being hurt by funding issues. The pension, which has taken out $80 million per month over the past six months, has seen its assets dip by 5% as it awaits a state Senate vote to approve a bond sale – a vote that would mean a $1 billion infusion if passed. Other state pensions would also benefit from that bond issue.
Municipalities in other states are feeling pension pain too, such as the town of Vallejo, Calif. The small city near San Francisco declared bankruptcy in 2008 and is now attempting to solve its shortcomings. According to a recent Bloomberg article, Vallejo is trying to deal with $195 million worth of unfunded pension obligations, its largest liability. The city is currently drawing up blueprints for its bankruptcy exit plan.
Despite such funding issues, public pensions usually have safety nets, however, to save pensions if problems do arise, says Ray Edmondson, CEO of the Florida Public Pension Trustees Association.
“If a [Floridian] city calls for a financial emergency, the state will take over, so the [retirees] are OK,” says Edmondson, adding there are strict laws on this issue to avoid pension failures. “And then there is [pension] insurance,” he adds
There are tens of thousands of public pensions in the U.S., he says, and the fact that so few have failed should lead one to a conclusion that this is not a trend.
“The pension plans are designed not to go bankrupt,” Edmondson states. “All we ask is that if the politicians negotiate benefits, that they then fund them.”