Public Pension Plans Have Time to Recover

Study of 126 state and local plans concludes most can pay claims for decades.

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While state and local pension plans are clearly hurting, a new report from the Center for Retirement Research at Boston College (CRR) finds that they are not facing short-term emergencies.

Depending on key assumptions about future investment returns, researchers conclude that even under stringent conditions, "most plans have enough assets to last for at least 15 years, although some notable exceptions exist." Using a more likely scenario for how state and local governments would handle future pension funding, the report said, "most plans have enough for at least 30 years" of payments.

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The "notable exceptions" cited in the report include public retirement plans in Connecticut, Illinois, Kentucky, Louisiana, New York City, and Rhode Island. Stressed plans, the CRR said, would likely be shored up by general government revenues. That's because pension benefits for existing participants "will be paid because they are contractual obligations of the employer."

The CRR tracks performance of 126 public defined benefit pension plans that represent 85 percent of all state and local pension assets and members. In 2001, these plans had enough assets to cover 24 years of annual benefit payments. However, this payment ratio dropped to about 20 after the dot-com bust and, since the recent recession, has plummeted to 13.

Reflecting the stock market decline, the report said, the plans' ratio of assets to their payment obligations dropped from 84 percent in 2008 to 79 percent in 2009. The market values of plan assets dropped from $2.6 trillion to $2.1 trillion during this period.

"But this decline is only the beginning of the bad news that will emerge as the losses are spread over the next several years," the CRR explained. And using more conservative assumptions that many experts recommend, it noted, "the funded levels are closer to 50 percent."

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In the short term, states and localities have little ability to improve pension finances, according to the report. In most places, promised pension benefits are protected by law and cannot be cut. Raising revenues to pump into plans is also not feasible. The weak economy has raised demand for government services while also reducing tax revenues.

The Center report—"Can State and Local Pensions Muddle Through?"—offers details on how long each of the 126 plans it follows would be able to pay their benefits. A key variable is how much money plans will earn on their invested assets. Using what it said was the most likely approach to future management of the plans, the study projected that annual investment returns of 8 percent would permit a typical plan to honor all its pension claims until the year 2041. Reducing annual investment gains to an average of 6 percent, however, would cut plan sustainability in half, to the year 2025.

Additional information on each plan is contained in the Public Plans Database, a joint effort of the CRR and the Center for State & Local Government Excellence.

Twitter: @PhilMoeller