Why Does Funding Status Vary Among State and Local Plans?

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While state and local pensions as a group are about as well funded as plans in the private sector, significant variation exists. Low levels of funding mean that future taxpayers will have to pay the cost of unfunded pension promises, as well as the unfunded costs of retiree health insurance.

This brief aims to sort out why some plans are less well funded than others. Key findings, from a sample of over a hundred state-administered and locally administered plans, include:

  • Although most public pension plans are in good shape, funding ratios do vary.
  • About 60 percent of plans are adequately funded, while about 40 percent are not.
  • Better funding is associated with a disciplined approach (the plan has an extended funding history, uses a more rigorous cost method, and makes its annual required contributions); good governance (the plan has an independent investment council); the size and type of plan (the plan is large and does not include teachers); and fiscal health (the plan is in a state with a relatively low debt burden).
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