About | HeinOnline Law Journal Library | HeinOnline Law Journal Library | HeinOnline
LOG IN
LOG IN

Underfunding of State and Local Pension Plans 1 (May 2011)

handle is hein.congrec/cbo8026 and id is 1 raw text is: CBO A series of issue summaries from the Congressional Budget Office MAY 2011 The Underfunding of State and Local Pension Plans The recent financial crisis and economic recession have left many states and localities with extraordinary budget- ary difficulties for the next few years, but structural short- falls in their pension plans pose a problem that is likely to endure for much longer. This issue brief discusses alterna- tive approaches to assessing the size of those shortfalls and the implications of those approaches for funding deci- sions: By any measure, nearly all state and local pension plans are underfunded, which means that the value of the plans' assets is less than their accrued pension lia- bilities for current workers and retirees. There are two leading approaches for valuing assets and liabilities, and the reported amount of under- funding varies significantly depending on which one is used. Decisions about how to address the underfunding can be informed by the choice between those two measurement approaches, but there is no necessary connection between the information provided by the two approaches and decisions about how much a plan's sponsor should contribute each year. According to the Public Fund Survey of 126 state and local pension plans, which account for about 85 percent of pension assets and participants in state and local pension plans in the United States, those plans held roughly $2.6 trillion in financial assets in 2009 but had about $3.3 trillion in liabilities for future pension pay- ments.1 Thus, those assets covered less than 80 percent of liabilities, and unfunded liabilities (the amount by which liabilities exceed assets) amounted to roughly $0.7 trillion.2 That share of liabilities covered by assets in 2009 was the lowest percentage in the past 20 years (see 1. Liabilities are measured as the present value of promised benefits. Present value is the value today of a series of payments made in the future, calculated by applying a discount rate to those payments. The lower the rate of discount, the higher the present value. Figure 1). By comparison, the amount of state and local governments' debt that was outstanding at the end of 2009 was $2.4 trillion. That estimate of unfunded liabilities is calculated on the basis of actuarial guidelines currently followed by state and local governments. Another approach for measuring pension assets and liabilities, which more fully accounts for the costs that pension obligations pose for taxpayers, yields a much larger estimate of unfunded liabilities for those plans in 2009-between $2 trillion and $3 trillion.3 In any event, most state and local pension plans probably will have sufficient assets, earnings, and contributions to pay scheduled benefits for a number of years and thus will not need to address their funding shortfalls immediately. But they will probably have to do so eventu- ally, and the longer they wait, the larger those shortfalls could become.4 Most of the additional funding needed to cover pension liabilities is likely to take the form of higher government contributions and therefore will require higher taxes or reduced government services for residents. Additional funding for pension benefits already accrued is unlikely to come from current workers; state laws and court opinions indicate that efforts toward that 2. See National Association of State Retirement Administrators, Public Fund Scorecard, available at www.publicfundsurvey.org/ publicfundsurvey/scorecard.asp (accessed March 22, 2011). The data do not include costs for retirees' health care. 3. See Alicia H. Munnell and others, Valuing Liabilities in State and Local Plans, Issue Brief 11 (Boston: Center for Retirement Research at Boston College, June 2010). For earlier estimates, see Robert Novy-Marx and Joshua D. Rauh, The Liabilities and Risks of State-Sponsored Pension Plans, Journal ofEconomic Perspectives, vol. 23, no. 4 (Fall 2009), pp. 191-210. 4. For a listing of actions taken in 2010, see Ronald K. Snell, Pensions and Retirement Plan Enactments in 2010 State Legislatures (National Conference of State Legislatures, November 23, 2010), available at www.ncsl.org/?Tabld=20836.

What Is HeinOnline?

HeinOnline is a subscription-based resource containing thousands of academic and legal journals from inception; complete coverage of government documents such as U.S. Statutes at Large, U.S. Code, Federal Register, Code of Federal Regulations, U.S. Reports, and much more. Documents are image-based, fully searchable PDFs with the authority of print combined with the accessibility of a user-friendly and powerful database. For more information, request a quote or trial for your organization below.



Short-term subscription options include 24 hours, 48 hours, or 1 week to HeinOnline.

Purchase Access

Contact us for annual subscription options:

Contact Us

Already a HeinOnline Subscriber?

Log In

profiles profiles most