Why Does Funding Status Vary Among State and Local Plans?

Introduction

While state and local pensions as a group are about as well funded as plans in the private sector, significant variation exists.  More than 60 percent are adequately funded, but almost 40 percent are not.  Low levels of funding means that future taxpayers will have to pay the cost of unfunded pension promises, as well as the unfunded costs of retiree health insurance.  Alternatively, if taxpayers balk at covering these pension commitments, future beneficiaries risk losing benefits, such as ad hoc cost-of-living increases.

This brief aims to sort out why some plans are less well funded than others.  Section I looks at the variation in funding among the 109 state-administered and 17 locally-administered plans in the Public Fund Survey and finds a strong relationship between plan size and funding status.  Thus, while a sizable number of plans are not well funded, three quarters of the assets are in well-funded plans.  Section II speculates about what factors — in addition to size — might affect funding levels.  These factors fall into four categories — funding discipline, governance, plan characteristics, and the fiscal health of the state.  Section III tests the importance of these factors on the funding of public pension plans using the Public Fund Survey and newly collected data…