How Did State/Local Plans Become Underfunded
State pension plans are shouldering a collective shortfall of $1.3 trillion dollars in unfunded liabilities. While the recent recession took a large toll on plans, however, other factors like inadequate contributions also play a role in underfunding. The Center for Retirement Research (CRR) recently released a report quantifying the factors that led to state and local plan underfunding. The CRR tracked five specific factors in 150 public plans from 2001 to 2013: 1) investment returns; 2) plan contributions; 3) actuarial assumptions; 4) benefit changes; and 5) other assumption changes. Using this data, CRR looked at how each of these factors impacted a plan’s unfunded liability over time.
For most plans, the main factor driving unfunded liabilities were low investment returns that fell short of what plans were expecting. But another important factor was failing to make adequate contributions, especially for the worst-funded plans (like New Jersey). While missed contributions accounted for close to half of New Jersey’s poor funding, for a better-funded plan like Georgia, missed contributions only impacted the plan’s unfunded liability by 18 percent. While the recession hurt all plans, poorly funded plans that were shorting or skipping contributions fell much further than well-funded plans.