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State Pension Plans Underfunded by $1.3 Trillion According to Study

State Pension Plans Underfunded

State Pension Plans Underfunded

According to a study by The Pew Charitable Trusts, state pension plans are experiencing a wider gap between assets and promised payouts to workers.

The gap between the total assets reported by state pension systems across the United States and the benefits promised to workers, now reported as the net pension liability, reached $1.1 trillion in fiscal year 2015, the most recent year for which complete data are available. That represents an increase of $157 billion, or 17 percent, from 2014.

Pew cited lower-than-expected investment returns in 2015 as a reason for the decline in the funded ration which dropped from 75percent in 2014 to 72 percent in 2015. Investment returns that fell short of expectations proved to be the largest contributor to the worsening fiscal position, with median overall returns of 3.6 percent in 2015. On average, state pension plans had assumed a long-run investment return of twice that—7.6 percent—for fiscal 2015. Although they have not tabulated the ratios for 2016, they are expected to drop once again as returns for state pension plans are projected to be 1 percent.

The report mentions that 2015-2016 may just be anomalies and that it does not suggest longer-term trends. However, they caution that market volatility is likely a more imminent problem.  Since the end of the Great Recession in 2009, overall median returns for public pension plans have ranged from 1.0 percent in 2016 to 21.5 percent in 2011.

The report concludes:

A worsening fiscal picture in fiscal 2015 was driven largely by weaker investment returns than in the previous year. Given the continued volatility in investment returns, state and local policymakers cannot count solely on returns to close the pension funding gap over the long term; they also need to follow funding policies that put them on track to pay down pension debt.

Even if pension plans had met their investment expectations in 2015, the gap would have increased because many state contribution policies did not reach positive amortization. A number of states improved on this measure—32 met the threshold for positive amortization in 2015 compared with just 15 in 2014. This reflects the timing of contribution calculations and improved funding conditions carried over from 2014, as well as the influence of efforts by state policymakers to strengthen contribution policies to start to close funding gaps.

Additional reporting on sensitivity analysis calculations included in the new GASB standards create a starting point for policymakers to understand how investment return assumptions drive the calculation of pension costs. A discussion of sensitivity analysis will be the subject of a forthcoming Pew brief.

Timothy Kelly
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