State and local government pension benefits are paid not from general operating revenues, but from trust funds to which public retirees and their employers contributed while they were working. On a nationwide basis, pension contributions made by state and local governments account for roughly 3.7 percent of direct general spending. Current pension spending levels, however, vary widely and are sufficient for some entities and insufficient for others.
In the wake of the 2008-09 market decline, nearly every state and many cities have taken steps to improve the financial condition of their retirement plans and to reduce costs although some lawmakers have considered closing existing pension plans to new hires, most determined that this would increase — rather than reduce — costs, particularly in the near-term. Instead, states and cities have made changes to the pension plan by adjusting employee and employer contribution levels, restructuring benefits, or both. Generally, adjustments to pension plans have been proportionate to the plan’s funding condition and the degree of change needed.