A Growing Gap Between Healthier and Worse Off Pension Plans

The gap has widened substantially between the best-off and worst-off pension plans.

The gap has widened substantially between the best-off and worst-off pension plans. Shutterstock


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New research offers a dim assessment of some of the most poorly funded state and local public retirement systems.

There's a growing gap between some of the nation's best and worst funded pension plans for state and local government employees, according to a report out this week.

Researchers with the Center for State and Local Government Excellence looked at data for the 180 plans in what's known as the Public Plans Database. They found that the overall funding level for these plans, as of 2017, was 72 percent, similar to the prior year.

But they also went a step further and broke the plans into three equal-sized clusters based on their funded ratios in 2017. (This ratio provides a measure of how well a fund's assets stack up against its obligations.)

Funded-ratios ranged from 81 to 111 percent for the healthiest group, 68 to 80 percent for the middle group, and 16 to 67 percent for the most troubled plans. The average funded ratios for the three groups last year were 90 percent for the top group, 73 percent for the middle group, and 55 percent for the least healthy group.

This in itself is not that surprising—the worst-funded pensions had the worst average funded ratios.

Flashback to 2001 though, and do the same analysis, and the average funding ratios for the plans that fell into the same clusters during that year were: 110 percent, 100 percent and 90 percent.

In other words, the gap has widened substantially between the cluster of best-off and worst-off plans.

"Generalizations often are made about all public plans as if they were monolithic, but they are not," said Joshua Franzel, president and CEO of the Center for State and Local Government Excellence.

The report notes that much of the divergence between the different groups of plans has occurred since the financial crisis that unfolded in 2008 and that "the worst-funded group has continued to deteriorate while the other two groups have stabilized."

What's driving this trend? The researchers look at three possibilities: benefit costs, contributions to the plans, and investment returns.

They find that costs are similar among the three groups. But they also conclude that contributions and investment returns lagged among the worst-funded plans, compared to the healthier pension systems.

Examples of plans that had funded-ratios that fell between 16 and 67 percent in 2017, according to figures in the Public Plans Database include: Kentucky's state employee retirement system (16.3 percent), a New Jersey pension plan for teachers (42.1 percent), and Illinois teacher pension system (40.2 percent).

The report notes ominously in its conclusion that the nation's "worst-off plans will likely require intervention beyond traditional reforms to change the trajectory of their funded status."

Bill Lucia is a Senior Reporter for Government Executive's Route Fifty and is based in Washington, D.C.

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