Public Plans’ Funding Improves Slightly, But Not Asset Growth

Funded level was 73% in fiscal 2018, helped by lower liability increases.

Things are looking a tad better for public pension funds. The funded level for state and local plans, namely the ratio of assets to liabilities, rose a smidgen in fiscal 2018, to 72.8% from 72.1% the year before, according to the Center for Retirement Research at Boston College.

Look closer, though, and you see that the ratio has been essentially flat since 2012, and that asset growth hasn’t been spectacular. Employer contributions have risen since the turn of the century, yet investment returns have been lackluster—the legacy of two terrible bear markets for stocks (2000-02 and 2008).

Since 2001, the investment return has been an average annual 5.9%. which is about two percentage points lower than the projected return. Fortunately for the funds, liability growth has declined over that period to 3.8% in 2018, from 7.7% at the century’s start.

One possible reason for the liability growth decline is that public workforces have become leaner. It’s unclear how many who left were qualified for a pension as state and local governments downsized. But since 2009, for the sizeable subset of state government noneducation employees at least, the headcount has fallen by 4.7% a Pew Charitable Trusts study finds.

The Center for Retirement Research notes that plans can increase their funded status by lowering assumed investment returns to a more realistic point. That would presumably impel public employers to up their contributions. Such donations, of course, can be difficult to pull off politically.

Beyond doubt, the halcyon days of fully funded public plans are two decades distant. The high-water mark came in 2000, when the average level was 103%. Because of stock woes and other bad news, that level dwindled until bottoming out in 2012. Since then it has been inching up, albeit with little momentum behind it.


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