Local Government Pensions in Good Shape

October 8, 2008 (PLANSPONSOR.com) - A new study of local government pension funding has found that the local plans are, as a rule, funded as well or better than their state-level counterparts.

Among locally administered plans, 15% have a funding ratio of less than 60% compared to 8% of state-administered plans, according to the study by Alicia H. Munnell, Jean-Pierre Aubry, and Kelly Haverstick of the Center for Retirement Research at Boston College.

“Based on our sample of 84 plans from 38 states, as of 2006, locally administered plans have funding strategies that are as good as or better than state plans,” the researchers asserted in their report.

The data also showed that:

  • In terms of a plan’s ability to make its entire annual required contribution (ARC), a 1.8% contribution increase would be required for state plans while local programs would only need a 1.6% increase.
  • 69% of local plans are making their total ARC, while 54% of state plans are doing so.
  • Required contribution increases noted in the report for some systems to make 100% of their ARC as a percentage of payroll included:Chicago Teachers (14.3%), Omaha Police and Fire (11.5%), Chicago Municipal (11.4%), St. Louis Police (10.6%), St. Paul Teachers (8.7%) , Newport News Employees (7.7%),   Philadelphia Municipal (4.8%), and Jersey City Municipal (4.1%).

The researchers say locally-run plans tend to aggregate at either end of the funding scale with a greater percentage fully funded and a greater percentage with very low levels of funding. For both state and locally administered plans, poorly funded plans are generally smaller in terms of participants than the average for the sample.

While there may be bright spots in the funding picture for local plans, the Boston College research team said "the positive news about the level of pension funding is overwhelmed by the lack of funding for state and local government retiree health care promises." (See  Governments Scramble to Meet GASB 45 Dictates )

Researchers estimate that the total unfunded liability for retiree health benefits is between $600 billion and $1.6 trillion, far greater than the unfunded liability for state and local pensions. "Funding and managing these obligations is the real retirement challenge that states and localities face," the Boston College researchers said.

The plans with the largest asset holdings in the sample studied, each with assets in excess of $32 billion, are the New YorkCity Employee Retirement System, the New York City Teachers Plan, and the Los Angeles County Employee Retirement System. The three smallest plans, each with assets under $20 million, are Dover (Delaware) General Employee Pension Plan, City of Spartanburg (South Carolina) General Employees Retirement Plan, and   Owensborough (Kentucky) City Employees' Pension Funds.

The sample represents 58% of local plan assets and 55% of local workers relative to the totals reported by the U.S. Census Bureau.

The full report is available  here .