New Analysis Has Somewhat Better News for State, Local Public Pensions
An interior look at the Kentucky State Capitol in Frankfort. Shutterstock
But challenges and uncertainty persist, especially for deeply troubled retiree benefit systems in states like Kentucky and Illinois. “Some plans are still in real trouble.”
Although some state and local government pension systems around the U.S. are in rough financial shape, the estimated overall level of funding for the retiree benefit plans nationally has stabilized in recent years, according to a new analysis presented Thursday.
“We’re seeing now kind of a new . . . stasis,” said Jean-Pierre Aubry, associate director of state and local research at the Center for Retirement Research at Boston College. He added: “Funded ratios have improved.” But, Aubry also noted, “some plans are still in real trouble.”
Aubry made his comments Thursday during an online seminar organized by the Center for Retirement Research and the Center for State and Local Government Excellence.
During the event he summarized the findings included in a research brief on state and local government pensions, which he co-authored with Alicia Munnell a professor at Boston College’s Carroll School of Management, and director of the Center for Retirement Research.
Healthy public pension funded ratios are important because they ensure governments will be able to pay benefits to retirees as promised. And in places where systems become sorely underfunded, or where costs become unwieldy, governments can be forced to funnel money toward pensions at the expense of other priorities, like infrastructure or education.
While the aggregate state and local public pension funded ratios in the new analysis are looking steadier than they did in the aftermath of the Great Recession, the figures still lag below more robust levels seen during the early 2000s—the era when the so-called “dot-com bubble” burst.
The funding status of the retirement systems in the coming years will be influenced strongly by the performance of pension fund investments, which will depend on factors like financial markets, broader economic conditions and decisions by fund managers.
A pension system’s funded ratio compares the value of its assets, such as cash, stocks and bonds, to its liabilities—the obligations it will owe to retirees.
Pension liabilities are not all due at once. They represent the amount of money needed to pay earned benefits to retirees over years of time. A low funded ratio is not necessarily a death knell for a pension plan. But as a funded level drops a system generally weakens, with more money going to pay annual benefits, while less is available to invest and generate financial returns.
The analysis presented Thursday was based on data for 160 large pension systems, including 115 state plans and 45 local plans. Together these cover 92 percent of the state and local public pension assets, and 90 percent of the members, covered by plans nationwide.
According to the analysis, the aggregate funded ratio for the 160 plans stood at 74 percent last year, up slightly from 73 percent in 2014. Since 2011, funded levels have hovered between 72 and 74 percent. That’s down from around 86 percent in 2007, the year the recession hit.
Funded ratios peaked at around 103 percent in 2000, the analysis shows.
Reasons behind the stabilization in funded levels seen in recent years, which Aubry pointed to, include: relatively strong investment performance; governments paying a greater amount of required pension contributions; and slower liability growth, due in part to benefit cutbacks.
Examples of individual plans that continue to face substantial funding shortfalls are the Illinois State Employees' Retirement System, which is about 36 percent funded, and the Kentucky Employees Retirement System, with a funded ratio of roughly 22 percent.
The analysis features projections for aggregate funded ratios from 2016 through 2020 under two different investment return scenarios.
One is based on a rate of return on assets at 7.6 percent, an average assumption for the public pension systems examined. Under this scenario, the overall funded level for the state and local pension systems would tick upwards to around 77.6 percent in 2020.
The second scenario uses a more conservative 4.5 percent asset return rate, derived from a sampling of what’s anticipated by some financial firms. With this assumption, the aggregate plan funded ratios drop gradually over the next five years to roughly 71 percent.
A full copy of the brief from Aubry and Munnell can be found here.
Bill Lucia is a Reporter for Government Executive’s Route Fifty. He is based in Washington, D.C.
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