State Pension Funds Fall Off a Cliff

Executive Summary

This study examines different measures of historical and current funding shortfalls in state pension plans. Two case studies are examined in greater depth to explore some fatal fl aws that have caused funding crises in these plans: Public Employee Retirement Association of Colorado (PERA) and the Kansas Public Employee Retirement System (KPERS).

SOME OF THE KEY FACTS AND ISSUES INCLUDE:

• A sharp decrease in the value of assets during the recent economic downturn caused the funding ratio in many state pension plans to fall significantly. In some of these plans, such as PERA and KPERS, unfunded liabilities have nearly doubled over the past year.
  
• Many of these state pension plans assume a rate of return on assets of eight percent or more. Because they assume a high rate of return on assets, state pension plans often invest in a portfolio heavily weighted towards equities, which can result in greater volatility in the value of assets, funding ratios, and unfunded liabilities.
  
• Even with a questionably high eight percent assumed rate of return on assets, government employers would have to signifi cantly increase contribution rates to bring the plans into actuarial balance. This would be difficult given the current recession and associated revenue shortfall.
  
• The financial crisis encountered over the past decade reveals that many state pension plans are fundamentally fawed. Using more realistic assumptions regarding the rate of return on assets, as well as assumptions regarding the actuarial value of liabilities, it is highly unlikely that these plans will achieve actuarial balance over the amortization period.
  
• The solution to the funding crises in state pension plans will require fundamental reform. Everything should be on the table, including changes in benefits and increased employee contribution rates, as well as employer contribution rates. These plans should consider replacing their defined benefit plans with defined-contribution plans for new employees.