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Public pension funds rebound from recession

David Gura May 20, 2013

Public pension funds rebound from recession

David Gura May 20, 2013

The heads of the country’s biggest public employment retirement systems are meeting this week in Honolulu to discuss pensions. Public employee pension funds took a big hit during the recession. Between 2008 and 2009, state and local governments lost about 30 percent of revenues. 

David Draine, senior researcher with The Pew Charitable Trusts, says most of that was from their investments.

“Equities and real estate, in bonds, and all those things took a real hit when the markets tanked,” Draine says.

Since then, we have seen some improvements.  

“It is true that equity markets have done better over the last year or two,” says Jeffrey Brown, the professor of finance at the College of Business at Illinois.

But that can only do so much. The recession shed light on a bigger problem. When times were good or better, state and local governments didn’t put aside as much money as they should have. 

“When you do that for long enough, what happens in financial markets, while important, pales in comparison to the size of the underfunding,” Brown says. 

The concern is these plans will run out of money and future retirees won’t get the benefits they’ve been promised. There are plenty of public employment retirement systems that are doing better, but that doesn’t mean they’re in great shape. 

The California State Teachers’ Retirement System, for instance, is the nation’s second largest pension fund, and while the value of its portfolio is almost back to what it was before the recession hit, CalSTRS is still underfunded. 

“The hole in some of these states, like Illinois, New Jersey, California, and so forth…the hole is so large that really there is no way out of it without imposing pain on lots of people, including the people in the system, including taxpayers,” Brown says. 

In some places, that’s started to happen. According to Tracy Gordon, with the Brookings Institution, people are coming to the table who haven’t in the past, to talk about changing cost structure and raising the retirement age. 

“A lot of states have moved in that direction, but of course they’re not going to see the benefits for several years,” she says. 

Gordon says reform takes time, and it’s not easy.

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