Recent headlines about Georgia’s public retirement systems have caused a great deal of concern. The more recent headlines have focused on how TRS and the Employees’ Retirement System (ERS) have lost $11 billion over the last three months because of the turmoil in the financial markets. Managing and administering the state’s pension systems is a complex task and this week’s column explains a few of the issues that managers, legislators and retirees face.

The $11 billion loss
An $11 billion loss is certainly substantial, but not devastating to the state’s two retirement systems. Before the recent downturn in the stock market, TRS had assets of $50.3 billion and ERS had assets of $15.2 billion. TRS’ assets dropped just over 17 percent to $41.6 billion, which is an $8.7 billion loss.  ERS’ assets dropped 17.8 percent to $12.5 billion, a $2.7 billion loss. Each 1,000 points the Dow Jones Industrial Average recovers more than likely restores part of the system losses.

During the same time, the Dow dropped 23.4 percent. One of the reasons Georgia’s pension systems have outperformed the market during this downturn are the statutory limits placed on the types of investments the systems can make. State law limits public pension systems to investing in 22 different types of financial instruments including stock in corporations having market capitalization over $100 million, cash assets, bonds issued by the federal government and land and assets. While this has worked in the plans’ favor during rough times, it has also limited the gains made by the pension systems during more prosperous times.  

Other state pension plans suffer as well
Other states have posted losses as well. According to a Stateline.org article, Virginia recently reported a 20 percent decline in the value of its fund since July or $11 billion and Tennessee lost 10.7 percent. Over the course of the last year, North Carolina’s $66 billion public pension fund has dropped 12 percent. New Mexico’s $9.7 billion employee pension fund fell by 10.2 percent, and Maine’s $9.6 billion pension fund, which has a highly conservative investment mix, has lost 14.5 percent.

It is important for readers to understand that pension plans do not judge their performance based on a short time frame. Based on recommendations from its actuaries, ERS uses a seven-year running average to evaluate the performance of its investments. This way, ERS does not does not adjust its strategies based only on short term information. Also, pension plans have weathered a number of other serious downturns including those in the 1970s, the 1987 market crash, and most recently the downturn after 9/11.

Employee Retirement System basics
ERS is a defined benefit plan, which means that the plan is employer sponsored and that retirement benefits are determined using a formula that takes into account length of service and salary. Because they are formula driven, the benefits paid to employees do not fluctuate based on market performance. But market performance is important.  

ERS by the numbers
As of June 30, ERS had assets of $15.2 billion and a retiree payroll of $984 million. Employee and employer contributions total about $350 million annually: so employer/employee contributions do not even pay for current yearly payments to retirees. Currently employees contribute at a rate of 1.25 percent percent of their annual salary, which equals $55 million a year. Employers contribute at a rate of 10.4 percent of employees’ salary, which is equal to $295 million a year.  Investment returns at 7.5 percent (the anticipated seven-year average return) contribute $1.14 billion.  

It is important to note that employer and employee contributions do not cover the retiree payroll. If investment returns are not sufficient, then the plan has to draw on its underlying assets.

• If the returns are only 5 percent, there is a gap of $224 that has to be made up.

• At a 3 percent return ERS would earn $456 million and have to use the entire employer and employee contribution of $350 million plus $178 million of its assets.

• At a 0 percent return, ERS would have to cover the entire payroll, using $350 million in contributions as well as $634 million in plan assets.

The plans can sustain some draw down during bad financial times because they bring in surpluses during good times. However, if investment returns do not meet the 7.5 percent average return for a long period of time, then this affects the ability of the fund to meet its current liabilities and reduces the “funded status” or the extent to which long term assets are greater than long term liabilities. If the funded status slips then the fund has several choices — it can increase contributions from the employer or employee or reduce benefits. But in times like these where the state is not producing new revenue, the ability of the state to increase contributions for payroll and COLAs is limited.