Generalizations Do Not Show the True Picture for Public Pensions

Looking at the average funded ratio of all public pensions leads to generalizations, but dividing them into groups shows many are doing well, while some will need serious intervention.

Not all state and local defined benefit (DB) plans are in the same fiscal positions, face the same challenges or have the same funding histories, points out a report from the Center for State and Local Government Excellence (SLGE) and the Boston College Center for Retirement Research (CRR), “Stability in Overall Pension Plan Funding Masks A Growing Divide.”

An analysis of the 2017 funded ratios of the 180 plans in the Public Plans Database (PPD) finds the average funded status remained steady under the traditional Government Accounting Standard Board (GASB) guidelines at 72%, which is largely unchanged from the past several years. However, separating the public pension plans into three groups by their 2017 funded status makes clear that underlying trends are not uniform.

The analysis divided the universe of PPD plans into three equal groups based on their 2017 funded status. The funded-ratio boundaries for the three groups were 16% to 67% for the bottom third, 68% to 80% for the middle third, and 81% to 111% for the top third. The average 2017 funded ratio for each group was 55%, 73% and 90%, respectively.

Looking over the past 17 years, plans that are well-funded had a larger portion of their required contributions paid, while contributions to the worst-funded plans have fallen far short of what is required to maintain reasonable funded levels. Over this same 17 year period, all plans, regardless of their cohort, have underperformed relative to their actuarial investment assumptions, but underperformance was greater for the lower-funded plans.

The researchers conclude that the top third of plans should remain on track with continued maintenance, while the middle third can improve by adopting more stringent funding methods. However, they say the bottom third of plans likely will require intervention beyond traditional public pension plan reforms to stop their downward trend.

Looking forward to 2018, the research indicates that the funded levels for plans likely will increase from 2017 levels due to the relatively strong market performance from July 2017 to June 2018. However, a market downturn threatens and could set back plan funding.