Earnings for U.S. Public Pensions Rise

inflation eagleU.S. public pensions had the largest investment earnings on record in the first quarter of 2012, $179.2 billion, the U.S. Census said on Thursday, offering some hope to the retirement systems for state and local governments that were battered during the financial crisis.

The record surge pushed total holdings and investments up 5.6 percent from the final quarter of 2011, to $2.8 trillion.

Total holdings and investments increased 0.7 percent from the first quarter of 2011, according to the Census, which has been keeping records on the country’s 100 largest state and local government employee retirement systems’ earnings since 1974.

“It looks like a strong quarter,” said Keith Brainard, research director for the National Association of State Retirement Administrators. “We also have to remember markets go up and down, which illustrates the importance of keeping a long-term view. I suspect when the June 30 numbers come out, some of the gains that were experienced in the first quarter will be taken back.”

The second quarter ends in a few days and the stock market has stumbled over the last three months. Brainard expects some of those declines to register among the pensions funds’ investments and that “earnings for this quarter will be, at best, a wash or maybe down a little.”

The Census also found that government contributions, essentially the taxpayer dollars that go into pension funds, reached the highest level on record in the first quarter. They grew 12.7 percent from the previous quarter and 14.5 percent from the same period a year earlier, to $24.2 billion.

Employee contributions, meanwhile, were $9.3 billion.

Investments make up the lion’s share of pension fund revenues, accounting for $6 out of every $10 in the funds, according to Pew Center on the States. The financial crisis caused earnings on the investments to plummet for three quarters in a row from the end of 2008 to the beginning of 2009. The value of pensions’ holdings scraped the bottom at $2.09 trillion in the first quarter of 2009.

Since then, their value has slowly inched closer to the $2.93 trillion reached in the final quarter of 2007, before the recession devastated the retirement systems’ balance sheets.

Corporate stocks and international equities provided most of the gains in the first quarter of 2012, Census data shows. Corporate stocks, which constitute more than a third of the retirement systems’ cash and security holdings, grew 17.6 percent from the previous quarter and 5.6 percent from the first quarter of 2011, to $967.2 billion.

International securities were the highest since the Census began breaking down that category in its report in 2000, $550 billion. That was an increase of 16.3 percent from the quarter before and a rise of 7.4 percent from a year earlier.

Federal government securities make up a smaller proportion of the retirement systems’ cash and security holdings but have experienced a surge, as well. Pension funds’ investments in Treasuries were $223.5 billion in the first quarter – a 25 percent increase from the prior quarter and a 29.8 percent surge from the first quarter in 2011. It was the highest level in nearly a decade.

Corporate bonds, though, tumbled in the first quarter, falling 6.9 percent from the previous quarter to $371.9 billion. That was 15 percent less than the $437.3 billion corporate bonds that major retirement systems held in the first quarter of 2011.

Typically, when investment returns are low, governments increase contributions. But during some of the worst budget crises in recent memory, state and local governments cut back just as the stock market plunged.

With recent retirement breakdowns in Rhode Island and the threats of further fiscal stress in other places, states are worried about how to fund future retiree benefits without cutting spending on vital programs.

The concerns are growing after the Pew Center on the States reported last week that the pension fund shortfall is now $757 billion, nearly $100 billion more than previously estimated.

The accounting board for state and local governments on Monday approved new standards for reporting pension finances that will make some retirement systems appear weaker.

Notably, it eliminated a process known as “smoothing,” where pension systems spread the liabilities over time, making the funds more reactive to volatility in financial markets. Funds can still spread out expenses, but over a shorter time frame.

Brainard said the sudden upswing in pension investment earnings shows the limits of making decisions based on only the most immediate information, saying it is akin to looking at the single frame of a long film.

(This story has been refiled to correct government contributions to $24.2 billion from $21.5 billion, to clarify records are on earnings, and to add Pew Center on the States)