Why Don’t Some States and Localities Pay Their Required Pension Contributions?

Introduction

Plan sponsors in the public sector, like their counterparts in the private sector, have accumulated substantial assets to fund their defined benefit pension promises.  A snapshot of funding shows that the ratio of assets to liabilities in the public sector is roughly equivalent to that in the private sector.  All is not perfect, however.  The level of funding among public plans does vary.  An earlier brief explored the factors that contributed to this variation.  One important contributor was the failure of a plan sponsor to make the annual required contribution (ARC).  This brief peels back one more layer of the onion and explores why some plan sponsors do not pay 100 percent of the ARC.

Section I sets the stage by describing the variation in funding status, the nature of the annual required contribution, and the extent to which plans satisfy this requirement, using a sample of 126 state and local plans from the Public Fund Survey and newly collected data.  Section II explores possible reasons why some sponsors do not pay the full ARC.  It turns out that more than two thirds of sponsors that fall short are constrained by law in what they can pay.  For those not constrained, some of the factors that could be important include lack of funding discipline, governance issues, plan characteristics, and the fiscal pressures facing the state.  Section III tests the importance of these factors on contributions…