The Funding of State and Local Pensions: 2014-2018

The year 2014 was always going to be a pivotal one for the funded status of public pension plans because, under the old GASB 25 accounting standards, the disastrous stock market performance of 2009 rotates out of the smoothing calculations for t he majority of plans that use a five-year averaging period. But 2014 also became pivotal because it was the first year that plan sponsors reported under GASB’s new accounting standards for their financial disclosures. The new GASB 67 standards involve t wo major changes. First, assets are reported at market value rather than actuarially smoothed. Second, in cases when assets are projected to fall short of future benefits, liabilities are valued using a “blended” discount rate. Although GASB standards apply to financial reporting only, when GASB 25 was in effect, most plans also used the same standards for funding purposes. Under GASB 67, however, plans are now using separate standards for reporting and funding. For reporting in their financial documents, all plans in our sample that have released 2014 data adopted the market valuation of assets as required by GASB 67, but only seven plans determined it necessary to use a significantly lower blended discount rate. For funding purposes (i.e. in plans’ actuarial valuations), they maintained the traditional approach used under GASB 25 of using smoothed assets and expected long-run returns for discounting. This brief focuses on the data used in plans’ actuarial valuations becaus e they provide the basis for historical comparisons and for funding decisions. The discussion is organized as follows. The first section reports that the ratio of assets to liabilities for the 150 plans in the Public Plans Database increased from 72 percent in 2013 to 74 percent in 2014. The second section shows that the required co ntribution increased from 17.8 percent to 18.6 percent of payrolls, while the percentage of required contributions paid increased from 82 percent to 88 percent. The third section revalues liabilities and recalculates funded ratios using the riskless rat e, as advocated by most economists for reporting – as opposed to funding – purposes. The fourth section projects funded ratios for our sample plans for 2015-18 under two economic scenarios. The fifth section briefly describes the information reported in the financial statements under the new GASB standards. The final section concludes that, if plans achieve their assumed returns, the public pension landscape should continue to improve over the next few years.