State and Local Pension Plans: Funding Status, Asset Management, and a Look Ahead

By Jagadeesh Gokhale
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State and local employee pension plans, which are primarily defined benefit plans, are now under greatly increased scrutiny. Plan funding conditions have worsened over the past number of years, especially during the aftermath of the post‐​2007 recession. The number of inadequately funded plans increased steeply during 2008-09, when the recession caused implosions in asset prices and state tax revenues. However, the patterns of financial changes vary considerably across the U.S. states and under alternative ways of measuring a plan’s funding status. Much of the worsening in conditions between 2001 and 2009 occurred in states with initially well‐​funded pension plans. This was not only due to economic conditions, but to illogical accounting standards set by the Government Accounting Standards Board.

This report provides a detailed review of the erosion that has occurred in state and local government employee pension plans during the last decade. Controlling for the declines in pension plan asset values during the recent recession, it also analyzes whether at least some of the blame for the current poor funding conditions of plans can be assigned to insufficient contributions by employers and employees. Finally, because pension plans are operated by government entities that are unlikely to be shut down, the report examines how pension funding conditions would change if future contributions and benefits were taken into account.

Key issues covered by the report include:

  • Pension plan funding: a close look at the best and worst states.
  • Analysis of what is behind the general pension funding decline over the past decade.
  • Investment management strategies taken by state and local government pension fund boards.
  • Analysis of whether employers and employees are contributing sufficiently to funds, and if poor initial plan funding stimulates pension contributions.
  • The impact of a government’s size on plan funding.
  • Do pension plan funding contributions depend on federal budget support?
  • How the funding shortfalls of state and local government plans are actually understated under standard actuarial accounting.
  • How plan funding conditions in 2009 appear under the alternative discounting of future benefit obligations.
  • Future expected pension benefit accruals.