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Public pension funding in practice

  • ALICIA H. MUNNELL (a1), JEAN-PIERRE AUBRY (a1) and LAURA QUINBY (a1)
Abstract
Abstract

Public pension funding has recently become a front-burner policy issue in the wake of the financial crisis and given the pending retirement of large numbers of baby boomers. This paper examines the current funding of state and local pensions using a sample of 126 plans, estimating an aggregate funded ratio in 2009 of 78% using GASB accounting methods. Projections for 2010–2013 suggest that some continued deterioration is likely. Funded status can vary significantly among plans, and so the paper explores the influence of four types of factors: funding discipline, plan governance, plan characteristics, and the fiscal situation of the state. Judging the long-term health of plans requires more than just a snapshot of assets and liabilities, and so the paper examines how well plans are meeting their Annual Required Contributions and what factors influence whether they make them. The paper also addresses the controversy over what discount rate to use for valuing liabilities, concluding that using a riskless rate of return could help improve funding discipline but would need to be implemented in a manageable way. Finally, the paper assesses whether plans face a near-term liquidity crisis and finds that most have assets on hand to cover benefits over the next 15–20 years. The bottom line is that, like private investors, public plans have been hit hard by the financial crisis and their full recovery is dependent on the rebound of the economy and the stock market.

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This list contains references from the content that can be linked to their source. For a full set of references and notes please see the PDF or HTML where available.

J. R. Brown and D. Wilcox (2009) Discounting state and local pension liabilities. American Economic Review: Papers and Proceedings, 99(2): 538542.

Henning Bohn and Robert P. Inman (1996) Balanced-Budget Rules and Public Deficits: Evidence from the U.S. States. Carnegie-Rochester Conference Series on Public Policy, 45: 1376.

Julia L. Coronado , Eric M. Engen , and Brian Knight (2003) Public Funds and Private Capital Markets: The Investment Practices and Performance of State and Local Pension Funds. National Tax Journal, 56(3): 579594.

B. A. Chaney , P. A. Copley and M. S. Stone (2002) The effect of fiscal stress and balanced budget requirements on the funding and measurement of state pension obligations. Journal of Accounting and Public Policy, 21: 287313.

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Journal of Pension Economics & Finance
  • ISSN: 1474-7472
  • EISSN: 1475-3022
  • URL: /core/journals/journal-of-pension-economics-and-finance
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