Most States Meeting Commitments to Fund Pensions

Despite perceptions that many states have fallen far short of their pension funding requirements, most states have made a reasonable effort to fund their share of pension contributions.

An analysis of the experience of 112 state-sponsored and statewide public pension plans in the U.S. for fiscal years 2001 through 2013 finds most states are meeting their commitments to fund their plans, with only a few conspicuously failing.

The National Association of State Retirement Administrators (NASRA) examined the performance of state governments in meeting the annual required contribution (ARC)—as defined by the Government Accounting Standards Board (GASB)—of their public employee retirement plans. The 112 plans account for more than 80% of all public pension assets and participants.

The weighted average ARC received was 84.4%; of $779 billion of combined ARC, plans received $657 billion. The average plan received 89.3% of its ARC. All but six states paid at least 75% of their ARC, and all but two states paid at least one-half of their ARC.

NASRA’s study report says New Jersey and Pennsylvania have weighted average ARC experiences that are notably lower than those of other states. New Jersey’s average is 38% and Pennsylvania’s is 41.2%. According to the report, for both states, the chronic underfunding began when required contributions had dropped to very low levels by historical standards, as low as zero for some plans, chiefly as a result of strong investment gains from 1995 to 1999. When required contribution rates rose, chiefly as a result of the 2000-02 market decline, the states experienced great difficulty in restoring the stream of pension funding payments that had previously been in place.

Findings from the analysis showed:

  • Policies (i.e., statutes, constitutional provisions or retirement board requirements) that require payment of the ARC generally produce better pension funding outcomes than polices that do not require payment of the ARC. Some plan sponsors, however, consistently pay their ARC without the requirement. Some have challenged requirements to pay their ARC and underfunded their pension plans.
  • The few states that conspicuously failed to fund their pension plans have a disproportionate effect on the total ARC experience.
  • Failing to make even a good-faith effort to fund the ARC increases future costs of funding the pension.
  • Policy constraints that prevent payment of the ARC can negatively affect the ability of employers to fund the pension plan.

NASRA notes that the onset of new accounting standards for public pensions heralds the end of the ARC (see “Changes Ahead for Public DBs”). Still, public pensions are expected to continue to calculate an actuarially determined annual contribution amount, and new GASB standards will require disclosure of the effort made to fund this amount. “The previous standards resulted in a broad recognition and appreciation for the value of adequately and appropriately calculating and funding an annual public pension contribution,” NASRA says.