It’s become conventional wisdom that state and local pensions are in a death spiral and taking their states down with them. The CW has it that powerful public sector unions squeezed unsustainable promises out of city halls across the land and funding those promises are bankrupting our towns and cities.
Not so much, actually. This post by my CBPP colleague Liz McNichol forecasts potentially good news.
To be sure, problem spots remain, but as the economy and the stock market improve, and as some changes in funding rules kick in, the situation looks to be improving. See Liz’s text for details, but here are the punchlines:
…the funding ratio — a comparison of the assets in state and local trust funds to the estimated cost of providing future benefits — likely stopped falling in 2012 and will slowly begin to recover over the next few years (see graph).
Under what they consider the most likely scenario for future growth in the stock market and the economy …researchers project that state and local pension trust funds will be large enough by 2015 to cover 82 percent of future liabilities. Many experts consider a funding ratio of 80 percent or higher to be adequate.
Along with the improvement in the market, states have implemented cost control measures, including suspending cost-of-living adjustments, increasing worker contributions to the funds, reducing benefits, and introducing hybrid plans that mix guaranteed with variable (401(k) type) benefits.
There are still basket cases out there. Illinois is notorious in this area and their state retirement fund, teachers’ fund, and public university pension ratios are about 36%, 47%, and 44%. In Wisconsin, on the other hand, where public sector unions are the alleged cause of everything bad, the retirement system has been funded at or above 99% since 2003.