Most state and local governments have fully funded their annual pension obligations over the past dozen or so years, with only a small number failing to do so.
That unfairly skews the overall numbers for public pensions, the National Association of State Retirement Administrators said in a report whose conclusions run counter to the popularly held belief that the public defined benefits model is in bad shape.
The association examined the annual required contribution records of 112 public pension plans from 2001 to 2013. It found that, in the aggregate, half of the plans met at least 95.1 percent of their required contributions. It also noted that:
- All but two states paid at least one-half of their annual required contribution, or ARC.
- All but six states paid at least 75 percent of their ARC.
- The average plan received 89.3 percent of its ARC.
Moreover, some of the state systems examined actually paid more than required.
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For instance, Wyoming's ARC was funded at an average rate of 108 percent with a surplus of $104.5 million, while Montana was funded at a rate of 107 percent and had a surplus of $152.8 million. Connecticut has an overall ARC funded rate of 109.5 percent with a surplus of $1.38 billion.
The study showed that 18 states were funded at 100 percent or more.
It said that when the two states with the worst records are removed from the overall calculation, the overall average ARC funding level for the rest of the systems increases from 84.4 percent to 88.5 percent.
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Those two big outliers in terms of underfunding were New Jersey and Pennsylvania.
New Jersey had an average ARC funded rate of 38 percent with a shortfall of about $23.3 billion and Pennsylvania had an average funded rate of 41.2 percent with a shortfall of nearly $15 billion.
The study indicated that for both states, the problem began with a way of doing business in the booming late 1990s that could not be sustained after the 2001 economic downturn and just got worse after the 2008 meltdown.
The required contributions for the plans had fallen dramatically due to strong investment gains, but when the market took its dives, higher contributions were required, and the overall difficult economic situation made it hard for the states to bring payments up to where they needed to be.
"We know that it is important for pensions to be funded for the same reason that it is important to pay up on mortgages — underfunding leads to a higher long-term cost," the association said.
Given that importance, what can states do to make sure that they hit their pension funding goals? Good statutes are important, but compliance — and the ability of pension plans to enforce statutory obligations — are even more important, it said.
Such was the case in New Jersey, where the ARC was not a "self-executing" appropriation, thus leaving plan administrators with no way to compel the legislature to meet the obligation.
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