The funded status of local and state pension plans rose slightly from 72% in 2013 to 74% in 2014, in part driven by a rising stock market over the past five years and that local and state governments are paying more toward their required annual contribution.
If the stock market continues to perform well, most plans will be over 80% funded in 2018, according to Alicia Munnell and Jean-Pierre Aubry in a recent issue brief for the Center for State & Local Government Excellence.
The elimination of 2009 from the smoothing process led to a sharp increase in actuarial assets and to the first improvement in funded status of public sector plans since the financial crisis, according to the issue brief.
The recession took hold in 2009 with a disastrous stock performance, which was averaged out over five years to smooth out the ups and downs. But in 2014, GASB issued new rules that allow assets to be reported at market value rather than actuarially smoothed and in cases when assets are projected to fall short of future benefits, liabilities are valued using a blended discount rate, according to the Center.
The new rules and the increase in the stock market boosted smoothed asset values by 7%. Since liabilities grew by only 4.5% in 2014, below their historical rate of 5.6%, funding rose, the report says.
Out of the 125 plans examined in their report, Munnell and Aubry found that when GASB 25 was in effect, most plans used the same standards for funding purposes. Under the new GASB 67 standards, plans are using separate standards for reporting and funding.
From 2013 to 2014, the required contribution increased from 17.8% to 18.6% of payrolls, while the percentage of required contributions paid increased from 82% to 88%, the report stated.
Future funded levels depend on three factors: cash flows (contributions and benefits), the growth in liabilities and the performance of the stock market, the report said.
Contributions and benefits rise slowly over time, so their average growth for the period 2015-2018 is assumed to equal their average growth over 2001-2014, according to the Center. Growth in liabilities, which will likely be restrained by the long-term benefit cutbacks enacted in recent years, is assumed to hold steady at the 2014 level of 4.5%.
Paula Aven Gladych is a freelance writer based in Denver.
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