Funded Ratio of State Public Pension Plans

Check out the following from our friends at the Tax Foundation:

Increasingly, the “defined benefit” model of retirement plan (where the employee is paid a lifetime annuity, based on years of service and final salary) is being replaced by the “defined contribution” model of retirement plan (where the employee owns and controls an investment account). One of many reasons for this shift is the tendency of DB plans to be underfunded (promises to pay exceeding available assets), which is structurally impossible for a DC plan. One estimate of private sector DB plan underfunding is over $300 billion.

State and local public employees, for the most part, have DB retirement plans. Much discussion has occurred in recent years to estimate how underfunded they are: the estimates start at $1.3 trillion and go up from there. The difficulty is that calculating the amount depends on your estimate of future rate of return. Most plans themselves project they will earn 7 to 8 percent on their investments, and critics say that is too optimistic.

The organization State Budget Solutions this month produced one such estimate, using a 3.2 percent rate of return (the 15-year Treasury bond yield rate). This calculates to public employee pension plans having only 39 percent of the assets they need to cover their promised payments—a $4.1 trillion gap. A map of their state-by-state funding ratio estimates is below.

Moody’s and the Government Accounting Standards Board (GASB) have sought to change reporting requirements to make it harder for public employee pension funds to increase liabilities without funding them. Further, many states are considering reforms to bring assets and benefits more in line with each other, and a few have implemented them.

As the map below indicates, New Mexico’s pension funds are 33% funded. That is not as woefully bad as Illinois and Connecticut, but it is among the bottom ten ratios among the states.

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3 Replies to “Funded Ratio of State Public Pension Plans”

  1. Here is the link to the state budget solutions article that is referenced, which goes into quite a bit more detail

    Here are some of the dire warnings from the state budget solutions article:
    1. NM has the nation’s 5th highest per capita unfunded public pension liability of $20,530;
    2. using the ratio of unfunded liability over gross state product, NM has the second highest in the country of 53%, and
    3. states and local governments have grossly UNDERSTATED the unfunded portions of future pension liabilities because they have typically used a capitalization rate of 8 % (the stock market indexes today is only about 10% above their levels in 2000) A more realistic projected rate of return is the 15 year treasury bond yield which is currently about 3 %. When the much lower projected capitalization rate is used, the unfunded portion of future public pension liabilities explodes.

    Just a reminder to the Democratic controlled state legislature that you can be as generous as you want to be with government pensions, but what happens if the taxpayers leave the state for lower tax havens?

  2. Why is retirement based on age 65 or 20 years of service? this makes NO sense, given increased longevity. So, if the retirement dates stay the same, then a switch to Defined Contribution is the only way out for the taxpayers.

  3. The solution is quite simple: Either we began to phase in the Defined Contribution model, as most Corporations have, or there will be no retirement money available for future State and Local employees!

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