State pension plans remain to be significantly underfunded with many plans failing to properly pay annual required contributions (ARC), according to a new brief by Pew. The aggregate unfunded liability for state plans was $968 billion in 2013, and is expected to remain over $900 billion despite recent reforms and favorable investment returns. Only 24 states paid at least 95% of their ARCs in 2013, and states that consistently did so from 2003 to 2013 had pension plans that were 75 percent funded, while those states that didn’t were funded at 68 percent.
Even paying the ARC in full does not necessarily improve a plan’s funded status. Part of the ARC is the debt payment, intended to pay down the unfunded liability. However, many plans adopt rolling amortization policies that lead to perpetual negative amortization (i.e. the debt payment never exceeds the interest cost), so that the unfunded liability is never paid off even if the ARC is paid in full. The brief notes that new GASB accounting standards can help policymakers better evaluate the sufficiency of a plan’s funding policy.
To read the full brief, go here.