Mercatus study: Delaware pension system looks good — and not so good

Delaware Public Employees' Retirement System, Dover, is either 81.4% or 40% funded, depending on how its unfunded liabilities are measured.

In a new study from the Mercatus Center at George Mason University, senior research fellow Eileen Norcross looked at the $7.7 billion retirement system's nine pension plans two ways, using Delaware's assumed rate of return and a current fair-market value.

Based on the retirement system's assumed return rate of 7.5%, the total unfunded liability of $1.03 billion puts the combined funding level at 81.4%.

But when measuring the unfunded liabilities at a risk-free discount rate of 2.03%, which is the current yield on 15-year Treasuries, the funding ratio for all nine plans drops to 40% and unfunded liabilities jump to $11 billion.

The largest plan — the $7.2 billion State Employees' Pension Plan — is 91.5% funded when using the system's assumed rate or 42% when using the Treasury rate.

“Delaware is considered a plan in good health,” Ms. Norcross said in an interview. The state has a history of making its full annual contributions, and in 2011 added reforms for new hires.

Pension administrator David Craik defended the retirement system's rate of return, which he argued is based on a diversified portfolio. “There are a lot of economic assumptions built into our assumption,” he said in an interview.

Keith Brainard, research director for the National Association of State Retirement Administrators, questioned the use of a market basis for calculating pension liabilities. “The methodology is an accounting number, but it's not helpful for the actual practice of funding or administering a pension plan. It produces a reflection more of the condition of the bond market than that of pension plans.”

Ms. Norcross said her university-based research group is trying to bridge the gap between economic theory and public pension practices.

The study is available at http://mercatus.org/publication/delawares-public-employees-retirement-system-complete-and-transparent-accounting.