Although they aren't shouting it from the rooftops, public pension officials are happily watching their plans move into surplus territory as the bull market of recent years charges on.
"We've seen a heck of a rally in this market and we are just sitting back," said Howard Bicker, executive director of the $42 billion Minnesota State Board of Investment, St. Paul. But trustees of the state's fully funded retirement systems are not likely to spend any money at this point because these market conditions won't last forever, he said.
Of 50 public pension plan executives informally surveyed by Pensions & Investments, 17 said their pension funds are overfunded and seven said they are fully funded.
Many of those surveyed acknowledged their fund's funded status could change quickly, depending on the U.S. stock market's gyrations and whether legislatures increase retiree benefits.
For Bill Reimert, a consulting actuary with Milliman & Robertson Inc. in Philadelphia, it's a question of how much to trust the stock market returns of late. He sees some of the plans he works with eagerly cutting employer contributions. "It will be difficult politically to get an increased budget approved," he said, if the market takes a downturn.
But some pension funds have implemented systems to anticipate surpluses and to bypass the state legislature.
The surplus in Louisiana may last two or three years, said Julia LeBlanc, Louisiana School Employees' Retirement System, Baton Rouge.
At her $1.5 billion fund, surpluses are refunded to the state through an "employer credit account." The surplus is put aside and isn't considered part of the pension fund until it is given back to the plan the next year in place of employer contributions.
Ms. LeBlanc said contributions, traditionally made by the local school districts, have not been enough to pay benefits for the past couple of years, and the system now is using a combination of contributions and investment income to pay benefits. Fortunately, it has yet to affect the investment performance of the fund, she added.
In Kentucky, the pension plan's overfunded status may quickly fade, thanks to the Legislature. The fund hasn't yet finished calculations, but it appears that legislation passed in 1998 to increase benefits may swiftly drain the excess funds, said Robert Leggett, deputy commissioner of investments.
As of June 30, 1998, Frankfort-based Kentucky Employees' Retirement System, one of the state's three retirement systems, had a funded status of 124%, according to the annual report for the $11.1 billion State Retirement Systems. The police system had a funded ratio of 104%, while the county employees' plan had a funded status of 107%.
The financial impact of the legislation will be felt over time and will show up actuarially in this year's annual report, which has yet to be compiled, said Mark Roberts, principal assistant to the general manager of the fund.
Trustees of the Public School Retirement System of Missouri, Jefferson City, also are waiting to see if legislation will take away their surplus. As of year-end 1998, the system had a 103% funded status, which translates into $508 million surplus. A bill to boost benefits that passed last year will cost the system its whole surplus plus $16 million this year, said Joel Walters, executive director of the $20 billion fund.
With an 8% assumed rate of return and a 10.4% actual return last year, it is hard to know where the fund currently stands. "These returns just can't keep up. The last three years have been real good," Mr. Walters said.
The Anchorage (Alaska) Police and Fire Retirement System's 149% funded ratio is the highest among the funds surveyed by P&I.
Although trustees are talking about improving benefits, they are also waiting for the state's Supreme Court to decide the outcome of a class action lawsuit in which members of the fund claimed that any leave they didn't take should have counted toward their pension benefits. If the court sides with the employees, the surplus could quickly shrink.
Chuck Laird, executive director of the $489 million fund, attributes the surplus to the fund's asset allocation and outside investment managers. The current asset mix is 35% large-cap equity, 12% small-cap to midcap equity, 12% international stocks, 35% domestic bonds, 5% real estate and 1% cash.
The largest pension plan in the United States also is turning its investment gains into benefit improvements, said Edd Fong, a spokesman for the $155 billion California Public Employees' Retirement System, Sacramento.
CalPERS is roughly 120% funded, which translates into about $17 billion in excess funding.
The board has made several benefit proposals to the Legislature. One of them would bump the percentage of salary an employee gets at retirement from 1.5% per year worked to 2% per year worked.
One benefit of the overfunding is that employee contributions have been eliminated, Mr. Fong said.
The $96 billion California State Teachers' Retirement System, Sacramento, is considering starting a gain-sharing program to take advantage of its 104% funding status. According to Cathie Eitelberg, national government practice leader in the Washington office of consultant The Segal Co., gain-sharing is a popular way to deal with surpluses: If investment gains are above a certain percentage, active employees, retirees and employers all share in the gain. For some retirees it may mean a 13th check in a year or a one-time lump-sum check. For employers it may mean a reduction in the contribution for a single year, with no guarantee that it will continue in the future. If there is a downturn, all parties are responsible for making up for the difference.
The most common reaction to a surplus is benefit improvements, Ms. Eitelberg said.
Howard Rog, vice president and actuary in Segal's New York office, said there is also a tendency to look at the gains of recent years and see the actuarial valuation is not keeping up with market valuation. An actuarial valuation smooths gains and losses over a certain period of time.
Mr. Rog has seen many of his clients change asset valuation methodologies over time to reflect the real gains of recent years, rather than smoothing them over the next five years or so.
A change in valuation also might lead to changes in other assumptions, such as mortality rates or contribution rates, but the assumed rate of return usually remains at 8% of total assets in a fiscal year.
Sticking with methods
Some pension funds, meanwhile, continue to use their tried and true methods. For example, Sparb Collins, executive director of the North Dakota Public Employees' Retirement System, Bismarck, said the $1 billion fund continues to use "fully funded actuarial finance under management."
The fund has been fully funded since June 30, 1998. If there is a surplus again this year, the system may increase pension benefits, and if it is underfunded, it may ask for higher contributions, Mr. Collins said.
But other pension executives and actuaries say the method is not really as easy as it sounds, depending on the specific state and what legislative initiatives are in place.
"If you're going to be in a surplus situation, it ought to be now," said Rob Wiley, chief financial officer for the $4.6 billion South Dakota Retirement System in Sioux Falls.
His own fund may or may not be overfunded. The actuarial value of assets yields a surplus ratio of 106.8%, while the present accrued ratio of assets vs. liabilities shows a plan 96.1% funded. Mr. Wiley puts more trust in the accrued ratio, which uses the market value of assets.
His pension fund essentially attempts to avoid surpluses by setting aside the money that is gained above the 8% assumed rate of return. Those gains are then allocated to fund benefit goals during a five-year rolling period. If the fund's investments underperform, then losses are incurred over a five-year period.
The methodology was developed to cut down on the whipsaw effect the stock market can have on the fund's valuation and to help accurately recognize when money is available to improve benefits, Mr. Wiley said.
Milliman & Roberts' Mr. Reimert sees his actuarial clients struggle with the possibilities raised by surpluses. "The big issue is really trying to maintain stable contribution rates once you're fully funded. . . . At times you will be building up a surplus. It's a question of how far you let that go," he said.