Future for State and Local Government Pension Funding not Bright

April 9, 2010 (PLANSPONSOR.com) – An update on the funding status of state and local government pension plans shows that while states and localities were on a path toward full funding of their pension liabilities, they were seri­ously knocked off track by the financial crisis.

According to the report prepared for the Center for State and Local Government Excellence, actuarial valuations for 2009 show that between 2008 and 2009, the ratio of assets to liabilities for the researchers’ sample of 126 plans dropped from 84% to 78%. Over the next several years, whether funding levels improve will ultimately depend on the performance of the stock market, but under the projection performed by the researchers, fund­ing ratios will decline to 72% by 2013.  

The 2009 unfunded liability for the sample of 126 plans is over $700 billion. According to the report, to pay off that amount over 30 years would require contributions to increase by about 2% of payrolls. To amortize the amount over 15 years (so that states and localities could reach full funding around their original target dates), states and localities would have to raise their contribution rate by substantially more.   

However, the report notes that states and localities may have only limited ability to increase employee contributions, because some state courts have ruled that the public employer is prohibited from modifying the plan for existing employees. Higher contributions from new employees will take a long time to have any substantial effect.   

The report suggests that if funding levels are to be restored quickly, the money must come primarily from tax revenues, but the recession has decimated tax revenues and increased the demand for state and local services. Thus, finding additional taxes to make up for market losses will be extremely difficult.   

The researchers contend that one small step that would be viewed as a commitment to responsible funding would be for states and locali­ties to at least pay their full ARC. Otherwise, the only option is to wait for the market and the economy to recover.  

The report also noted that in 2009, as in earlier years, funding levels vary substantially. Fifty-eight percent of plans had funding below the “acceptable” 80% level. Although many of the poorly funded plans are rela­tively small, several large plans, such as those in Illi­nois (SERS, Teachers, and Universities) and Connecticut (SERS), had funding levels below 60%.   

The report is here.