2021 Update: Public Plan Funding Improves as Workforce Declines

When our last update on state and local pension funding was released in May 2020, public finance experts were projecting declines in government tax revenue due to the economic fallout from the pandemic, and investment experts were cautious about the stock market after the March crash. But, since then, the stock market has recovered mightily from the March 2020 lows and reports show better-than-expected revenue for state and local governments. Yet, one other disruption from the pandemic – a dramatic reduction in the size of the state and local workforce – may have negatively impacted public pension finances. This update documents the reported funded status of plans as of Fiscal Year (FY) 2020 and uses what we know about 2021 to estimate the current funded status of plans. The discussion is organized as follows. The first section estimates that the aggregate ratio of assets to liabilities for public plans rose from 72.8 percent in 2020 to 74.7 percent in 2021. At the same time, the average actuarially determined contribution is estimated to rise from 21.3 percent to 22.0 percent of payroll. The second section documents the COVID-related decline in state and local employment and investigates its impact on plan funded levels and contribution rates. The final section concludes that the cuts to state and local employment in response to COVID have had only a minor impact on funded ratios and required contribution amounts, but they do explain the increase in the required contribution rates, which are now expressed as a percentage of lower payrolls.