Local government retirement plans in worse shape than those of states

18 Nov 2010 by Jim Fickett.

Almost all of the focus, in research on state and local retirement plans, is on the states. For pension plans this is probably justified – only 10% of the combined membership is at the local level, and problems are entirely analogous. However there is some evidence that for retirement health care plans the problems at the local level are comparatively much more serious.

Most studies of unfunded state and local government retirement obligations concentrate on state plans, sometimes including a small representative sample of local plans. This is necessary because, as of the 2008 Census Bureau inventory, there were 2332 local government pension plans, and it is more than challenging to track down data on all of them.

Local plans, though numerous, claim only 10% of the combined state and local pension plan members, and 16% of assets. As a consequence, it suffices to have a detailed knowledge of the condition of state plans, and a more cursory knowledge of local plans. Most studies simply assume that local plans are more or less in the same condition as state plans. Is this assumption justified?

For pensions, the overall condition of local plans does indeed seem to be very similar to that of state plans. A 2008 Boston College study, using 2006 data, looked at 84 local government plans across 38 states, covering about 58% of local plan assets. For plans providing data on unfunded obligations, this study found an average funding ratio of 85%, compared to 84% for state plans. To bring contributions for all 84 of the local plan contributions up to the level of the Actuarial Required Contribution would have required an adjustment, in aggregate, of 1.6% of payroll, compared to 1.8% for state plans. (Note: that was before the crash; the numbers are worse now.)

A 2010 study by Rauh and Novy-Marx, extrapolating from 77 of the largest local plans, found that the unfunded pension liability at the local level was, as a percentage of revenue, almost precisely the same as that for the states.

There is much less data on retirement health care obligations. One Government Accountability Office study of retirement health care benefits, including all state plans and 39 large local government plans, found that the unfunded liability of the local plans was $129 billion, 24% of the combined $530 billion for both state and local. These 39 plans probably covered less than half of all local government plan members. If we double the $129, just to get a rough idea of what the total might be for all local plans, this would bring the local amount to about 40% of the combined total unfunded obligations. Given that local pension plans only have 10% of combined state and local pension plan members, this suggests that local retirement health care plans are in considerably worse shape than state plans.

This conclusion is supported by data on at least one state. In a study of all New York health care retirement plans, the two state plans had, together, unfunded liabilities of $60 billion, while all local plans had, in aggregate, unfunded liabilities of $145 billion – almost two and a half times greater. In contrast, Census data show that in 2008 state pension plans had assets of $277 billion and local pension plans had assets of $116 billion, suggesting that, as in most states, the state plans have far more members.

(Source material and links may be found on the new Reference page Local government retirement funds.)