The Status of Local Government Pension Plans in the Midst of COVID-19

The update’s key findings are:

  • Despite the recent market recovery, during fiscal year 2020, local government pension plans will see virtually no change in their average funded ratio.
  • And, going forward, the strains on government finances due to the recession could make it harder for localities to pay their required pension contributions.
  • But projections show that local plans are quite sustainable on a cash-flow basis. Most can pay benefits indefinitely at their current contribution levels.
  • The only exceptions are the very worst-funded plans, which face the real risk of exhausting their assets.

2020 Update: Market Decline Worsens the Outlook for Public Plans

The update’s key findings are:

  • If markets remain at their current levels through June, state and local pension plans will end FY 2020 with negative investment returns and reduced asset values.
  • As a result, their aggregate funded ratio will slip below 70 percent, and they will face higher actuarial costs going forward.
  • While this outcome is a step backwards in plans’ funding progress, most plans will have enough to pay benefits indefinitely.
  • Some of the worst-funded plans, though, do face an increased risk of exhausting their assets, and the cost of covering benefits on a pay-go basis would be very high.

Update on the Funded Status of State and Local Pension Plans – FY 2018

The update’s key findings are:

  • The funded ratio of state and local pensions edged up to 73 percent in FY 2018, but has been largely flat for several years and is well below its peak in 2001.
  • Liability growth has steadily declined during the past two decades – from 7.7 percent in 2002 to 3.8 percent in 2018 – but asset growth has been even slower.
  • Given these trends, if plan sponsors want to improve plan funded ratios, a key challenge is to increase their asset base through contributions.
  • One way forward is to adopt more stringent funding methods such as level-dollar amortization and shorter amortization periods.
  • Another, more important, change is to lower assumed investment returns, which would help ensure funding progress by further raising required contributions.