The Issue Brief, “The Funding of State and Local Pensions: 2013-2017,” from the Center for Retirement Research at Boston College points out that under the old Governmental Accounting Standards Board (GASB) accounting standards, the disastrous stock market performance of 2009 rotates out of public defined benefit plans’ smoothing calculations. In addition, under new GASB standards (see “GASB Issues Guide for New Pension Standards”), assets will be reported at current market value rather than being actuarially smoothed. In 2013, market assets surpassed actuarial assets and are projected to continue to outpace actuarial assets in 2014, so the use of market assets should help funded ratios, the report notes.
Also, under new standards, projected benefit payments will be discounted by a combined rate that reflects the expected return for the portion of liabilities that are projected to be covered by plan assets and the return on high-grade municipal bonds for the portion that are to be covered by other resources. The report says it is unclear the extent to which discount rates will really change for reporting purposes, and GASB standards are not intended for determining funding contributions.
Given the uncertainty over changes in discount rates, researchers made projections for 2014 to 2017 using three standards: old GASB; new GASB with assets at market; and new GASB with both assets at market and combined-rate discount rate. For 2014, this results in funded ratios of 75.2%, 80.6% and 69.5%, respectively.
But, the researchers concluded that regardless of the measurement standard, a continued healthy stock market will improve the funding picture for public pensions in 2014. What happens thereafter depends very much on the performance of the stock market and the extent to which plans adjust their discount rates, but in 2017, assuming a healthy stock market, state and local government pension plans should be at least 80% funded.
The Issue Brief may be downloaded from here.