There are signs that pension funding is improving. The picture is brighter for these reasons:
- Local governments have been making changes to their plans over the last five years
- Managers have worked hard to explain fiscal realities to employees
- Benefits have been adjusted when plans failed to meet their assumptions
- Local governments generally have a good track record of paying the full annual required contribution (ARC)
- Years of stock market losses are gradually being replaced by years with equity gains.
In a new study released by the Center for State and Local Government Excellence, there is evidence that locally-administered pension plans have started to close the gap with better-funded state-administered plans. The study looks at why the gap exists, given the fact that local plan sponsors have a better track record of paying their ARC than state plan sponsors. The explanation?
- State plans have historically earned higher returns because they invest more in risky assets. These higher returns more than offset lower contributions.
- During the financial crisis, though, local plans were able to narrow the funding gap because their more conservative investment portfolios fared better.
There is, of course, wide variation in the fiscal health of local pension plans. The poorly funded plans tend to get the most media attention, but there are many plans that remain over 80 percent funded. To access the report, go to http://slge.org/publications/locally-administered-pension-plans-2007-20