Despite a very strong 2014 (bar caLPERS), U.S. pension funds remain in dire straits. According to a July 2015 report from the Pew Charitable Trusts, total unfunded U.S. state and local pensions likely topped $1 trillion in 2014. Of, note 2013 is the last year for which official figures are available, so Pew had to estimate this figure.
The authors of the Pew report explain the scale of the pension fund liability problem and what needs to be done. “[For 2014,] reported pension debt is expected to remain over $900 billion for state plans, which increases to more than $1 trillion when combined with the shortfalls in local pension systems, and will stay at historically high levels as a percentage of U.S. gross domestic product. State and local policymakers cannot count on investment returns over the long term to close this gap and instead need to put in place funding policies that put them on track to pay down pension debt.”
New reporting standards for pension fund liabilities later this year
The actuarial required contribution (ARC) is the metric used by states to assess the adequacy of pension fund contributions, The ARC is established using a minimum standard set by accounting rules. Of note, state pension contributions came to a total of $74 billion in 2013 ($18 billion short of what was needed to meet the ARC), with just 24 states contributing at least 95% of the ARC. The Pew report points out that states that met at least 95% of the ARC from 2003 to 2013 had retirement systems that were 75% funded, while states that did not were only funded at 68%.
[drizzle]However, it is important to keep in mind that ARC “does not always signal true fiscal health.” The good news is that Governmental Accounting Standards Board (GASB), an independent organization recognized by governments, the accounting industry, and the financial markets as the official source of generally accepted accounting principles for state and local governments, has developed more comprehensive standards designed to offer additional information on pension funds’ health. These new standards will come into effect for pension fund data produced after June 15, 2014.
The limitations of the ARC can be seen in the recent history of pension fund liabilities in four states. Alabama, Arizona, Tennessee, and West Virginia all contributed 100% or more of their ARC on average in the decade from 2003 to 2013. Both Tennessee and Arizona had close to fully funded retirement systems in 2003, with only 1% liability. However, a decade later, Tennessee’s pension funds were still well funded at 94%, but Arizona’s had dropped to only 72% funded.
In 2003, West Virginia’s pension plan ranked last in the nation, and Alabama’s was in 20th place. However, in the next decade, West Virginia upped its ARC funding ratio from 40% to 67% and moved to the middle of the pack. However, Alabama’s ratio came down from 93% to 66% over the decade, dropping it to 30th place among the states.