By Chuck Reed, chair of RSI
New research from the Center for Retirement Research at Boston College shows that state and local pension plan funding fell flat, even fizzled, in 2016. Using both traditional and new Governmental Accounting Standards Board (GASB) standards, researchers Jean-Pierre Aubry, Caroline Crawford and Alicia Munnell sampled 170 state and local pension plans to determine funded ratios (refresher: old GASB standards use a smoothed value of assets, while new GASB standards, introduced in 2014, values market assets).
It's not surprising that under both standards of measurement, pension funding across the board simply didn’t stack up. In 2016, plans were 72 percent funded under the traditional rules, with asset values of $3.5 trillion and liabilities of $4.8 trillion. Under the new rules, plans fared even worse with only 68 percent funded ratios, including $3.4 trillion in assets and $5 trillion in liabilities.
Furthermore, the researchers found that liabilities under each standard grew by 5.6 percent and 6.3 percent, respectively.
“State and Local Pension Plan Funding Sputters in FY 2016,” Jean-Pierre Aubry, Caroline Crawford and Alicia Munnell. July 2017. Sources: 2016 actuarial valuations; Public Plans Database (PPD) (2001-2016); and Zorn (1990-2000).
Why the poor performance? It comes down to market returns and cash flow. When plans are counting on an assumed rate of return of 7.6 percent, yet only report a 0.6 percent return (as was the average in the study), it leads to drastic underfunding. Furthermore, cash flow has become increasingly negative as pension benefits continue to outweigh contributions. Many plans have not paid 100 percent of what they should have contributed since 2001, adding to pension debt. Instead, it should be the number one goal of state and local governments to fully fund employee benefits, as they are earned, and incentives to underfund commitments should be eliminated.
“State and Local Pension Plan Funding Sputters in FY 2016,” Jean-Pierre Aubry, Caroline Crawford and Alicia Munnell. July 2017. Source: PPD (2001-2016).
No matter which standard is used to measure pension funding, state and local plans are falling short. In the meantime growing pension liabilities are threatening the solvency of public employee retirement plans. By counting on overly-ambitious rates of return, not setting adequate contribution amounts and not paying the full amount that they do set, plans are putting at risk the retirement security of many workers.