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NCPERS Analysis Shows Public Pension Plans Consistently Meet Obligations

State and local pension plans have consistently been able to meet their benefit and other payment obligations over the past quarter century, according to a data analysis published November 16 by the National Conference on Public Employee Retirement Systems.

Between 1993 and 2016, contributions and investment earnings by 6,000 public pension plans exceeded benefit obligations in all but four years. And during those four years – 2002, 2008, 2009, and 2012 – all plans met their obligations in the aftermath of recessions because they had built up cushions during normal times, according to the analysis conducted by Michael Kahn, director of research for NCPERS.

The findings offer a striking counterpoint to initiatives under way in some states and municipalities to dismantle public pensions because they are considered under-funded, said Hank H. Kim, NCPERS’ executive director and counsel. “Our analysis demonstrates that pension plans can tolerate ups and downs in the markets and still meet their current obligations,” Kim added. “While funding ratios are an important actuarial tool, they are not a proxy for a plan’s ability to pay benefits here and now.”

Critics of public pensions often cite funding ratios of less than 100% as evidence of pressing financial problems, but this is faulty logic, Kim said. Contributions and earnings continue to flow into plans even as benefits are being paid out, he noted. “Shutting down a pension plan because it is not fully funded is like turning in the keys to your home because you can’t pay off the entire mortgage balance this month,” Kim said. “It is an incredibly short-sighted action that destabilizes workers and their communities, and we want it to stop.”

Kahn found that individual states – regardless of whether their pension plans were underfunded or fully funded – had between five and eight years in which income fell short of obligations, and had to draw on their cushion to pay benefits. Far from being a cause for concern, “this is exactly what public pensions are designed to do – to provide a steady income over the long haul,” Kahn noted. “Pension assets typically are invested over a 30-year time horizon, so plans aren’t blown off course by short-term market shifts.”

NCPERS offered four recommendations for public pension plans:

  • Stop dismantling plans on grounds that they are not fully funded.
  • Improve funding by determining the appropriate levels of required employer contributions.
  • Establish a pension stabilization fund that can set aside money from a certain revenue stream to be used in special circumstances such as a recession.
  • Implement a mechanism to ensure that full employer contributions are made on a timely basis, perhaps by making employer contributions a non-discretionary part of the budget.