What’s wrong with this picture? The stock market is up; state and local government revenues are on the rise; and governmental pension plans have made record numbers of changes, raising employee contributions for all workers and/or reducing benefits for new workers. However, the funded status of public pension plans has once again slipped.
The latest issue brief from the Center for State and Local Government Excellence, entitled The Funding of State and Local Pensions: 2011–2015, takes a look at 126 state and local pension plans and attempts to answer this question.
The result is somewhat of a mixed bag. As the Center’s President and CEO, Beth Kellar, puts it, “Readers can find reason to feel encouraged or worried as they read the analysis from the research team at the Center for Retirement Research (CRR) at Boston College.” Indeed.
On the positive side, CRR finds that during 2011, the funded status of public plans slipped only slightly -- from 76 percent to 75 percent. This result reflects only a modest gain in the value of actuarial assets, reflecting the smoothing of gains and losses over several years. However, even when that is factored in, 36 percent of the plans in the brief’s sample have a funded ratio of over 80 percent.
There was also an unexpected reduction in liability identified, dropping to 3.4 percent from 4.6 percent in 2010, and about 6 percent in earlier years.
Going forward, CRR projects that the funded ratio will remain steady next year and then gradually improve as the weak stock market experienced in 2009 is fully phased out of the calculation and replaced by years of positive market performance.
But…..
The issue brief also notes that the 75 percent funded ration in 2011 is based on liabilities discounted by the expected long-term yield on plan assets (roughly 8 percent), and revalues liabilities using the riskless rate, “as advocated by most economists for reporting purposes,” showing an aggregate funded ratio in 2011 of only 50 percent. Unfortunately, the brief does not directly acknowledge the vigorous debate surrounding this topic or the arguments against discounting liabilities by a risk-free interest rate.
Furthermore, the issue brief finds that the Annual Required Contribution (ARC) rose to 15.7 percent of payrolls in 2011. And the percent of ARC paid dipped to 79 percent.
Next, the issue brief projects funding for 2012–2015 and shows that, under the most likely of three stock market scenarios, the aggregate funded ratio will remain steady next year, and then gradually rise by 2015, but only to 82 percent – far short of the 103 percent average in 2000, or even the 88 percent level in 2007.
Finally, CRR points out that the reason that the growth in liabilities has slowed is that states and localities have laid off some workers, frozen salaries, and reduced or suspended COLAs. “Because many of these changes are one-shot, liability growth is likely to pick up somewhat in coming years,” CRR concludes.
The issue brief contains an appendix showing the ratio of assets to liabilities for 136 state and local plans for 2001–2010, along with projections for 2011.
• The Funding of State and Local Pensions: 2011–2015
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