State and Local Pension Plan Funding Sputters in FY 2016

The aggregate funded status of state and local pension plans declined in fiscal year (FY) 2016, because liabilities continued to grow steadily while poor stock market performance led to slow asset growth. Thus, the ratio of assets to liabilities fell whether measured by the old Governmental Accounting Standards Board standard (GASB 25), which uses a smoothed value of assets, or by the new standard (GASB 67), which values assets at market. While the new standard has been in effect since 2014, m ost plans also still report numbers under the traditional rules. As such, this brief provides a multi-year comparison of the two approaches. The discussion is organized as follows. The first section reports that the ratio of assets to liabilities for the 170 plans in the Public Plans Database decreased from 73 percent in 2015 to 72 percent in 2016, as measured by the traditional GASB standard; and from 73 percent to 68 percent, as measured by the new standard. The second and third sections separately evaluate the changes in assets and liabilities, respectively. The fourth section shows that, for the sample as a whole, both the required contr ibution and the percentage of required contribution paid have remained relatively constant since 2015. The fifth section projects funded ratios for our sample for 2017-2021 under two scenarios of investment performance. Even though 2017 has been a very good year in terms of market returns, plan funded ratios are projected to grow only modestly by 2021 even if plans achieve their assumed returns (currently 7.6 percent on average). The final section concludes that, in order to see more meaningful improv ement in funded levels going forward, plans need to set and pay a more sufficient actuarially determined employer contribution, in addition to achieving their assumed returns.