The funding of state and local pensions: 2012-2016

Abstract

This 2012 update on the funded status of state/local pensions will be one of the last two based on the Governmental Accounting Standards Board’s(GASB) old provisions, under which assets are reported on an actuarially smoothed basis, the discount rate is the long-run expected rate of return, and the annual required contribution (ARC) serves as a well-defined metric against which to measure the extent to which plan sponsors are meeting their obligations. Under these standards, despite a rising s tock market, the rebound in tax revenues, and increased employee contributions, the funded status in 2012 declined slightly. This result, which at first seems surprising, reflects the fact that liabilities continued to grow – albeit at a slower pace com pared to the past – while the actuarial value of assets increased only modestly, reflecting asset smoothing procedures that continue to include losses from the 2008-09 market crash. In addition to providing a 2012 update, this brief offers a glimpse of the world when GASB’s new proposals go into effect in 2014 and reports projections for the period 2013-2016 under both the old and new GASB standards. The discussion is organized as follows. The first section reports that the ratio of assets to liabilities for our sample of 126 plans declined from 75 percent in 2011 to 73 percent in 2012. The second section shifts from a snapshot of funded status to spo nsors’ required payment. The update shows that the ARC – at 15.3 percent of payrolls – and the percent of ARC paid – at 80 percent – were virtually unchanged between 2011 and 2012. These funded ratios and ARCs, however, are based on promised benefits di scounted by the expected long-term yield on plan assets, roughly 8 percent, so the third section revalues liabilities using the riskless rate, as advocated by most economists for reporting purposes. The fourth section provides a preview on funding under GASB’s new provisions and compares the new GASB-funded ratios with those produced by the current standards. The fifth section projects funded ratios for our sample plans for 2013-16 under three alternative economic scenarios and under both the old and new GASB standards. The final section concludes that while the shift in GASB standards will make monitoring funding more difficult, the public pension landscape should improve over the next few years if financial markets do not collapse again.

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