Measuring the Fiscal Health of State Pension Plans

A state pension plan’s annual funded ratio gives an end-of-fiscal-year snapshot of the assets as a proportion of the accrued liabilities. In aggregate, the funded ratio of these plans dropped to 72 percent in 2015 from 75 percent in 2014. Across the country, funded ratios for plans reviewed by The Pew Charitable Trusts ranged from 37 percent in New Jersey to 104 percent in South Dakota.

The underlying funding differences among pension plans and states reflect policy choices, including plan design, contribution policies, and investment return assumptions, in addition to pension fund performance in the stock market. Pew’s issue brief “The State Pension Funding Gap: 2015,” published in April 2017, outlines these differences in detail.

The effectiveness of funding policies can be gauged by a metric developed by Pew called net amortization. This measures whether total contributions to a public retirement system would have been sufficient to reduce unfunded liabilities if all actuarial assumptions—primarily investment expectations—had been met for that year. The calculation uses the plan’s own reported numbers and assumptions about investment returns. Plans that consistently fall short of this benchmark can expect to see the gap between liabilities for promised benefits and available funds grow over time.

In fiscal year 2015, 32 states achieved positive amortization, more than double the previous year’s number. The reasons are twofold. First, contributions from states and participating local governments were $7 billion, or 10 percent, higher than in 2014. Second, the contribution benchmark—relatively volatile from year to year, as plan funding varies due to investment performance and other factors—was $11 billion lower in 2015 than in the previous year.

Fourteen states had positive amortization in both years, while 18 fell short in both. New York’s amortization was positive in 2015, although the state did not report a comparable number in 2014 using the new standards developed by the Governmental Accounting Standards Board. The remaining 17 went from negative amortization in 2014 to positive in 2015. Generally, states that crossed into positive amortization improved funding levels, increased contributions, or both.