The Funding of State and Local Pensions: 2015-2020

The funded status of state and local pension plans based on the Governmental Accounting Standards Board’s traditional rules (GASB 25) increased slightly in 2015. The main reason is that, despite the poor stock market performance in 2015, returns over the last five years have been strong. Conversely, the funded status based on the new GASB 67 rules, with assets at market value, showed a slight decline in the funded rate primarily due to the subpar 2015 returns. In 2015, most plan sponsors continued to maintain the traditional GASB rules (with smoothed assets and expected long-run returns for discounting) in their actuarial reports for the purposes of funding. For reporting in their financial documents, however, all plans adopted the new GASB rules of valuing assets at market, and 10 plans in the Public Plans Database also used a blended discount rate to account for a projected exhaustion of assets. This brief focuses more on the data in the actuarial reports u sed for funding purposes, because 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 160 plans in the Public Plans Database increased slightly from 73 percent in 2014 to 74 percent in 2015. The second section shows that the re quired contribution, for the sample as a whole, increased to 18.6 percent of payrolls, while the percentage of required contribution paid increased to 91 percent from 86 percent in 2014. Given the controversy about the appropriate discount rate, the thi rd section revalues liabilities and recalculates funded ratios using a variety of discount rates. The fourth section briefly examines the plans that, for reporting purposes, use a blended discount rate under the new GASB standards. The fifth section pro jects reported funded ratios for our sample plans for 2016-20 under the assumption that plans meet their expected returns and under an alternative assumption that they realize the substantially lower returns projected by many investment firms. The final section concludes that, if plans realize their assumed returns, the public pension landscape should continue to improve over the next few years; but if returns fall short, funded levels will deteriorate.