Most states are making a good faith effort to meet their annual required contributions (ARCs) to their state pension systems. That’s the conclusion the National Association of State Retirement Administrators (NASRA), an association of the directors of state and territorial public retirement systems, draws in a recent study.
NASRA looked at the ARC received by 112 public pension plans in states and the District of Columbia — plans that collectively comprise more than 80% of all public pension assets and participants in the United States — from fiscal years 2001 to 2013. It found that most governments (those of states, cities, school districts, etc.) made good faith efforts to fund their pension plans and that only a few “severely neglected” their responsibilities to fund their pension plans.
The report also notes that they contended with what it calls a “perfect storm”: many plans increased benefits in the late 1990s, followed by a decline in capital markets in 2000-2002 and a severe recession in 2008-2009. And the effects of these challenges were exacerbated by simultaneously rising pension contributions. NASRA says that from 2001 to 2013, the ARC grew by 239%, from $27.7 billion to
$93.8 billion. Collectively, the governments just couldn’t keep up, according to NASRA, which says that during that period their actual contributions grew by 174%, from $27.8 billion to $76.2 billion.
Key findings were:
The Governmental Accounting Standards Board (GASB) in 1994 introduced the ARC, which is the amount that employers need to contribute, after accounting for other revenue (chiefly expected investment earnings and contributions from employee participants) to adequately fund a public pension plan. The ARC is the sum of the cost of pension benefits being accrued in the current year (known as the normal cost), plus the cost to amortize, or pay off, the plan’s unfunded liability.
An issue brief NASRA issued in February concerning state and local government spending on public employee retirement systems suggests that in general, in the wake of the Great Recession those governments have acted to improve the financial condition of their retirement plans. NASRA says that state and local governments’ pension contributions amount to just under 4% of their direct general expenditures.
NASRA looked at the ARC received by 112 public pension plans in states and the District of Columbia — plans that collectively comprise more than 80% of all public pension assets and participants in the United States — from fiscal years 2001 to 2013. It found that most governments (those of states, cities, school districts, etc.) made good faith efforts to fund their pension plans and that only a few “severely neglected” their responsibilities to fund their pension plans.
The report also notes that they contended with what it calls a “perfect storm”: many plans increased benefits in the late 1990s, followed by a decline in capital markets in 2000-2002 and a severe recession in 2008-2009. And the effects of these challenges were exacerbated by simultaneously rising pension contributions. NASRA says that from 2001 to 2013, the ARC grew by 239%, from $27.7 billion to
$93.8 billion. Collectively, the governments just couldn’t keep up, according to NASRA, which says that during that period their actual contributions grew by 174%, from $27.8 billion to $76.2 billion.
Key findings were:
- State policies (i.e., statutes, constitutional provisions, or retirement board requirements) that require payment of the ARC generally produce better pension funding outcomes than polices that do not require payment. There are extremes: Some plan sponsors consistently pay their ARC without a requirement to do so, while others have challenged ARC requirements and underfunded their pension plans.
- Only a few states have failed to adequately fund their pension plans.
- The few states that failed to fund their pension plans have a disproportionate effect on the aggregate ARC results.
- Most states made a good faith effort — defined as paying 95% or more of the ARC — to fund their pension plans.
- Not making a good faith effort to fund the ARC increases future pension funding costs.
- Policy constraints that prevent payment of the ARC can impair employers’ ability to fund the pension plan.
The Governmental Accounting Standards Board (GASB) in 1994 introduced the ARC, which is the amount that employers need to contribute, after accounting for other revenue (chiefly expected investment earnings and contributions from employee participants) to adequately fund a public pension plan. The ARC is the sum of the cost of pension benefits being accrued in the current year (known as the normal cost), plus the cost to amortize, or pay off, the plan’s unfunded liability.
An issue brief NASRA issued in February concerning state and local government spending on public employee retirement systems suggests that in general, in the wake of the Great Recession those governments have acted to improve the financial condition of their retirement plans. NASRA says that state and local governments’ pension contributions amount to just under 4% of their direct general expenditures.
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