The Pending Crisis for State and Local Pension Funds

Source: Center for Retirement Research at Boston College

The Funding of State and Local Pensions: 2009-2013

by Alicia H. Munnell, Jean-Pierre Aubry, and Laura Quinby

Introduction

The financial crisis reduced the value of equities in state and local defined benefit pensions and hurt the funding status of these plans.  The impact will become evident only over time, however, because actuaries in the public sector tend to smooth both gains and losses, typically over a five–year period.  The first year for which the crisis will have a meaningful impact on reported funding status is fiscal 2009, since in most cases the fiscal 2008 books were closed before the market collapsed.  After 2009, the funding picture will continue to deteriorate to the extent that years of low equity values replace earlier years of high values.  The current and future funding status of state and local pensions is crucially important, as state and local governments are facing a perfect storm: the decline in funding has occurred just as the recession has cut into state and local tax revenues and increased the demand for government services.  Finding additional funds to make up for market losses will be extremely difficult...

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