Public Pensions in Good Shape to Meet Liabilities

July 10, 2008 ( - A new Government Accountability Office (GAO) report indicates most state and local government pension plans have enough resources to fund the benefits they will owe over the next several decades.

The GAO found that 58% of 65 large pension plans were funded at 80% or better in 2006, a decrease since 2000 when about 90% of plans were funded at that level. However, it said pension benefits are generally not at risk in the near term because current assets and new contributions may be sufficient to pay benefits for several years.

Experts and officials pointed out to the GAO that public employee pension benefits were safe in part because state and local governments do not go out of business or cease operations. They also suggested that being overfunded would be unwise because the extra funds could be a target for lawmakers wanting to use the extra funds for other things or to increase public employee benefits.

The experts said the decline in funded ratios for plans over the years is mostly attributable to the decline of the stock market. GAO’s own analysis of several factors affecting the funded ratio showed that changes in investment returns had the most significant impact on the funded ratio between 1988 and 2005, followed by changes in liabilities.

Of 70 plans in the GAO’s data set, six had funded ratios below 80% between 1994 and 2006, and two plans had funded ratios below 50% for the same time period. Experts told the GAO that lower funded ratios and unfunded liabilities do not necessarily indicate that benefits for current plan members are at risk since liabilities are generally not paid off in a single year.

A number of governments reported not contributing enough to keep up with yearly costs, with sponsors of 46% of plans in the GAO's data set contributing less than 100% of their annual required contribution (ARC).

Some of the governments that did not contribute the full ARC in multiple years were sponsors of plans with lower funded ratios, the report said. In 2006, almost two-thirds of plans with funded ratios below 80% did not contribute the full ARC in multiple years

The GAO said the failure of some to consistently make their ARC undermines their funding progress and is cause for concern.

The GAO report is here .