The Underfunding of State and Local Pension Plans
May 6, 2011
The recent financial crisis and economic recession have left many states and localities with extraordinary budgetary difficulties for the next few years, but structural shortfalls in their pension plans pose a problem that is likely to endure for much longer. A new report from the Congressional Budget Office discusses alternative approaches to assessing the size of those shortfalls and the implications of those approaches for funding decisions.
- According to the Public Fund Survey of 126 state and local pension plans, which account for about 85 percent of pension assets and participants in state and local pension plans in the United States, those plans held roughly $2.6trillion in financial assets in 2009 but had about $3.3 trillion in liabilities for future pension payments.
- Thus, those assets covered less than 80 percent of liabilities, and unfunded liabilities (the amount by which liabilities exceed assets) amounted to roughly $0.7trillion.
- That share of liabilities covered by assets in 2009 was the lowest percentage in the past 20 years.
- By comparison, the amount of state and local governments' debt that was outstanding at the end of 2009 was $2.4trillion.
That estimate of unfunded liabilities is calculated on the basis of actuarial guidelines currently followed by state and local governments -- actuaries compute liabilities by discounting future benefit payments using a discount rate based on the expected rate of return on the plans' assets. Another approach for measuring pension assets and liabilities, called the fair value approach, more fully accounts for the costs that pension obligations pose for taxpayers because it aims to measure the market value of an asset or liability. This approach yields a much larger estimate of unfunded liabilities for those plans in 2009 -- between $2 trillion and $3 trillion.
Source: "The Underfunding of State and Local Pension Plans," Congressional Budget Office, May 4, 2011.
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