According to the report, the last year in which the market value of state pension assets exceeded liabilities for the 64 retirement systems was 2000, with a combined $795 billion in assets vs. $727.4 billion in liabilities. The actuarial value of those assets, however, came in at $725.8 billion that year.
Among the plans that reported, Wilshire found an average 67% allocation to equities, which includes private equity and real estate — an increase of two percentage points from the prior year. According to the report, the increasing equity allocation "suggests that pension funds remain committed to stocks," although equity allocations varied widely among individual retirement systems.
Public plan officials are looking long-term and staying the course, according to Mr. Foresti. "I wouldn't read too much into the increase in equities," he said, adding the slight move upward isn't necessarily the sign of a shift. Rather, Mr. Foresti said, it's most likely a "consequence of recent market performance."
The asset shortfall for state retirement systems slightly trails that of corporate pension plans and is similar to that of city and county retirement systems, according to the Wilshire report. As of Dec. 31, 2003, the latest data available, defined benefit assets for S&P 500 companies totaled $1.03 trillion, compared with pension liabilities of $1.15 trillion, for a total funding ratio of 89%. As of June 30, 2003, city and county pension assets totaled $148.6 billion, compared with liabilities of $179.2 billion, for a total funding ratio of 83%, according to Wilshire data.
"I don't know how you compare the two," Mr. Nesbitt said of public and corporate pension plans. They face different regulations, he said, and public plans also use a different approach in viewing unfunded liabilities.
"Keep in mind," Mr. Nesbitt said, unfunded liabilities are "not something we have to address in one year." Rather, public retirement systems will address those liabilities over the next 30 years, he said.
Ronald J. Ryan, founder and chief executive officer of asset-liability management firm Ryan ALM Inc., New York, said there is an "inherent problem" with liability valuations in general as a result of accounting and actuarial rules. He said the discount rates pension plans use to price their liabilities and determine rates of assumption are not market rates, as is the case with corporates.
Indeed, the Wilshire report said results are dependent on how they're calculated. The unfunded actuarial accrued liability, or UAAL, has increased over the last five years, which indicates "deteriorating financial health for most state retirement systems," the report stated. However, actuarial values are often calculated using a smoothing method "in order to reduce the impact of market fluctuations when determining pension fund contributions."
"If the UAAL were calculated using market value of assets, the positive market return over the last year would have led to a decline in the UAAL … indicating improved financial health for most state retirement systems," the report said.
Until they are priced at market, Mr. Ryan believes, "you cannot effectively manage assets and liabilities." He believes the asset side will continue to be mismanaged until the rules are changed. Public pension plans currently price their liabilities under Actuarial Standard of Practice Rule 27, which requires plans to estimate asset growth as the discount rate. Corporate plans calculate liabilities under terms of the Financial Accounting Standards Board and the federal Pension Funding Equity Act of 2004, which replaced the 30-year Treasury securities interest rate with a temporary rate based on long-term investment grade corporate bonds. The higher interest rate reduces the calculated current liability for an underfunded plan.
"The whole asset side is in jeopardy of not understanding their objective" because the discount rates are not market rates, Mr. Ryan said. Plans need the ability to price liabilities closer to the market "often and accurately," he said. Pension liabilities are often priced only annually, and public plans often price liabilities every three years.
Mr. Nesbitt noted he believes it's too early to tell whether ASOP 27 and the Pension Funding Equity Act has had or will have a significant effect on the funding status of plans. "These are ongoing, funded pension plans" that are constantly experiencing new hires and new incoming money, he said. "Not everyone's going to retire at once."