This excerpt is taken from The Week in Public Finance in Governing magazine.
By Liz Farmer, August 26, 2016
Most Pensions Falling Behind
A new analysis of state public pension plans this week shows that only one in three states are actually on a path to reduce their unfunded liabilities.
The report, by the Pew Charitable Trusts, used a new metric called net amortization, which essentially measures whether a pension plan's accounting assumptions and payment schedule are holding up over time. Only 15 states are achieving positive amortization, according to Pew. In other words, they're following contribution policies that are sufficient to pay down pension debt. The remaining 35 states are facing negative amortization, or are following contribution policies that allow the funding gap to continue to grow.
Based on the measure, the plans in the worst shape are, in order: Kentucky, New Jersey, Illinois, Pennsylvania and California. The report does note that Pennsylvania has committed to large contribution increases and is projected to reach positive amortization by 2018. The top five plans in the best shape are West Virginia, New York, Indiana, South Dakota and Louisiana.
The Takeaway: This metric gets at the true health of a pension plan better than the annual funding status because it tells us in which direction a pension plan is going. Net amortization supplies the long view, which seems appropriate when talking about a program that's supposed to last for generations.
Case in point: 40 states reported decreased unfunded liabilities in 2014 thanks to stronger-than-expected investment returns. This is great news for the short term, but, according to the report, only a small number met the positive amortization benchmark. "Investment returns vary widely over time," the report said, "and most governments that sponsor pension plans made contributions that were not large enough to reduce debt based on expected long-term rates of return."
The measure helps explain why some plans -- such as Houston's or the state of Alabama's -- haven't made up ground even though governments have paid their full pension bills.
By Liz Farmer, August 26, 2016
Most Pensions Falling Behind
A new analysis of state public pension plans this week shows that only one in three states are actually on a path to reduce their unfunded liabilities.
The report, by the Pew Charitable Trusts, used a new metric called net amortization, which essentially measures whether a pension plan's accounting assumptions and payment schedule are holding up over time. Only 15 states are achieving positive amortization, according to Pew. In other words, they're following contribution policies that are sufficient to pay down pension debt. The remaining 35 states are facing negative amortization, or are following contribution policies that allow the funding gap to continue to grow.
Based on the measure, the plans in the worst shape are, in order: Kentucky, New Jersey, Illinois, Pennsylvania and California. The report does note that Pennsylvania has committed to large contribution increases and is projected to reach positive amortization by 2018. The top five plans in the best shape are West Virginia, New York, Indiana, South Dakota and Louisiana.
The Takeaway: This metric gets at the true health of a pension plan better than the annual funding status because it tells us in which direction a pension plan is going. Net amortization supplies the long view, which seems appropriate when talking about a program that's supposed to last for generations.
Case in point: 40 states reported decreased unfunded liabilities in 2014 thanks to stronger-than-expected investment returns. This is great news for the short term, but, according to the report, only a small number met the positive amortization benchmark. "Investment returns vary widely over time," the report said, "and most governments that sponsor pension plans made contributions that were not large enough to reduce debt based on expected long-term rates of return."
The measure helps explain why some plans -- such as Houston's or the state of Alabama's -- haven't made up ground even though governments have paid their full pension bills.
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