How Did State/Local Plans Become Underfunded?

This brief presents a new tool that describes the evolu­tion of the unfunded liability for each of the 150 plans in the Public Plans Database. The period of analysis is from 2001, when most plans were fully funded, to 2013, when virtually every plan reported significant underfunding. The goal is to identify the impact on underfunding of a few well-defined factors, such as poor investment returns, inadequate contributions, and benefit changes. The discussion proceeds as follows. The first sec­t ion describes the methodology and presents the re­sults for one of the better-funded plans in our sample. The second section examines the range of experiences across plans, which are classified as good, average, or bad based on their funding performance . While all plans were hurt by two financial crises, bad plans also significantly undermined their financial position by failing to make adequate contributions and having to correct for overly optimistic actuarial assumptions. The final section conclude s that this type of analysis presents a clean story of what happened in each plan. It reports the impact of the financial crises, but also highlights the inadequacy of plan sponsor contribu­tions. This new tool provides a valuable way to cut through the political rhetoric and identify why a plan is in trouble.