State and Local Public Pension Funding Levels Steady—For Now

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The outlook for the coming years is gloomier, as the coronavirus drags on the economy and strains governments’ finances.

The average level of funds state and local government pension plans have to cover their obligations to retirees through the close of fiscal 2020 is looking to be close to where it stood in 2019, despite the financial turmoil the coronavirus outbreak has caused, according to a new analysis.

But the projections in the report also show overall funded ratios for state and local pension plans eroding over the next five years, with a handful of especially troubled plans running the risk of insolvency within the next decade if they remain on their current paths. 

The Center for State and Local Government Excellence and the Boston College Center for Retirement Research released the analysis on Tuesday. It updates research on state and local pension plans the groups released in May.

The new report estimates the overall funding level for the local pension plans analyzed will be around 70.8% in fiscal 2020, down slightly from 72.1% in fiscal 2019. Most of the plans have fiscal years that close in June, but some end in December.

For state public plans, the report says, the aggregate 2020 funded ratio was 72.4%, just shy of the 73% level for those plans in 2019.

The report provides two sets of projections for 2025. One is based on investment returns that pension plans anticipate and the other on a scenario under which returns fall short of those levels, but are in line with actual returns over the past two decades. 

For local plans, the 2025 funded ratio is 64.6% in the anticipated return scenario and 61.7% in the lower return model. For state plans, those levels are 68.2% and 65.2% respectively.

Pension benefits are funded using a combination of contributions from workers and employers, along with investment returns. Funded ratios provide a basic measure of how well a retirement system’s assets stack up against what it is expected to owe retirees in future years.

If investment returns fall short of planned levels, state and local governments could have to contribute more money to pensions to keep them in good financial health. In many cases, plans have seen investment returns miss targets this past year.

Even in the less optimistic scenario described in the report, state and local plans on average will arrive in 2025 with enough assets to cover 10 years of additional benefits.

That said, the outlook remains gloomy for some of the nation’s local pension plans with the worst funded ratios, like Chicago’s plans for municipal workers (11%) and police (24%), a city plan in Providence, Rhode Island (33%) and Dallas’ plan for police and firefighters (34%).

“Plans with extremely low funded ratios in 2020 may face the risk of running out of assets in the foreseeable future if markets are slow to recover,” the report says.

The estimated government contributions required to prevent the trust funds for these pensions from running dry, on average, is nearly 50% of payroll costs, assuming the plans earn investment returns of 5.6% (the average annualized return for local plans since 2001). 

If the funds run out of assets, and benefits are covered on a pay-as-you-go basis, those costs would be even heavier.

Some of the troubled plans could end up in 2025 with enough assets to cover only five years or less of benefit payments to retirees, the report says. That assessment aligns with the analysis that SLGE and the Boston College Center for Retirement Research published in May.

Bill Lucia is a senior reporter for Route Fifty and is based in Olympia, Washington.

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