Recession Strains on Governments Could Make It Difficult for Local Governments to Make Future Required Pension Contributions
A new analysis of local public pension plans indicates that despite the ongoing COVID-19 pandemic and economic downturn, local government pension plans will see virtually no change in their average funded ratio during fiscal year 2020. Moreover, projections indicate that local pensions are quite sustainable on a cash-flow basis, and most can pay benefits indefinitely at their current contribution levels.
However, strains on government finances due to the COVID-19 recession could make it harder for localities to pay their required pension contributions. Projections beyond 2020 suggest that the finances for all public plans will deteriorate further, with local plans slightly worse off than state plans.
These findings are contained in a new research brief from the Center for State and Local Government Excellence (SLGE) and the Boston College Center for Retirement Research (CRR), The Status of Local Government Pension Plans in the Midst of COVID-19. The research is available here.
“It is still unclear the extent to which the COVID-19 pandemic and related economic downturn will negatively affect the overall finances of state and local governments,” said Joshua Franzel, SLGE president and chief executive officer. “Given the differences in revenue structures, intergovernmental transfers, access to capital, and overall service and programmatic responsibilities, it is likely that there will be both similarities and differences regarding impacts on states versus localities.”
In May 2020, SLGE and CRR released 2020 Update: Market Decline Worsens the Outlook for Public Plans to assess where public pensions were headed by the end of 2020 and beyond. Building on this research, the current brief focuses more specifically on the 80 local government plans in the Public Plans Database, which represent 60 percent of all local pension members and assets.
Overall, state and local plans appear to be on a similar path, both in the near and long-term. For 2020, funded ratios are projected to be 70.8 percent for local government plans, relative to 72.4 percent for state plans. Also, depending on two different market scenarios – one based on expected returns and another on more muted returns – local plans are projected by 2025 to have an aggregate funded ratio between 64.6 percent and 61.7 percent, while state plans are projected to have an aggregate funded ratio between 68.2 percent and 65.2 percent.
Stakeholders should note that for plans in the sample with the lowest funded ratios currently, there is a real possibility that they will exhaust fund assets soon after 2025, requiring significantly larger annual budget allocations in order to provide promised benefits.
This research brief is part of ongoing research that tracks the fiscal health of public pensions across the U.S. This research and the accompanying appendices rely on the Public Plans Database (PPD) to report on the funded status of public pensions.
The Center for State and Local Government Excellence gratefully acknowledges the financial support of ICMA-RC to undertake this research project and its support of the Public Plans Database.
Center for State and Local Government Excellence | 202.256.1445 | [email protected] | @4GovtExcellence