Stability in Overall Pension Plan Funding Masks a Growing Divide

In fiscal year 2017, the aggregate funded ratio for state and local pension plans under traditional government accounting rules was 72 percent, largely unchanged from the past several years. However, this stability belies growing disparities in individual plan funding. While plans with extremely low funded ratios garner most of the public spotlight, a sizable shar e of plans are well-funded and financially stable. As such, much can be learned from analyzing trends for specific groups of plans that underlie the aggregate story. The discussion proceeds as follows. The first section provides an update of the aggregate funded level for 2017 based on the most recent reports from the 180 plans in the Public Plans Database. The second section divides the sample of plans into thirds ba sed on their 2017 funded ratio, and traces the history of funding for each group. The data show that the average funded ratios for each third were relatively similar in 2001, but have diverged since. The third section investigates potential reasons for this divergence by reviewing each group’s benefit levels, funding discipline, and investment returns from 2001-2017. The fourth section projects future funded levels in aggregate. The final section concludes that the top third of plans should remain on track if they maintain their current course while the bottom third will likely need to make major changes. One concern that all plans share is the possibility of a market downturn, which could set back funding for several years.