Funding of State and Local Government Pension Plans

State and local government pension plans will not be able to meet obligations from current income if current benefit and financing provisions are continued. The few fully funded plans should remain in good shape, but the numerous poorly funded plans can expect financial difficulty in this century. The plans are generally prepared in accordance with recognized actuarial procedures. Of the 72 State and local pension plans reviewed, 19 met the minimum funding standard for private pension plans. For the other plans to adopt the approved funding standard, some would have to raise their contributions by more than 100 percent, a few by more than 400 percent. The costs of compliance with Federal law would require the equivalent of up to 49 percent more of the tax revenues of the affected jurisdictions. A systematic funding plan for amortizing the unfunded liability over a specific period could help avert fiscal disaster for a number of State and local governments. Pensions are often increased without providing adequate funding, a concession that does not raise current costs significantly, but does raise unfunded liabilities. A major obstacle to pension reform is the immediate cost impact. There is a question as to the extent of the Federal Government's authority to regulate State and local government pension plans. To protect the pension benefits earned by public employees and to avert fiscal disaster, State and local governments should fund the normal or current cost of their pension plans on an annual basis and amortize the plans' unfunded liabilities. Many jurisdictions have relied more and more on Federal grant funds and revenue sharing to help meet pension plan costs. It might be in the national interest for Congress to ensure, through legislation, the long-term financial stability of these pension plans through second funding standards. A funding standard like the Employee Retirement Income Security Act would have a substantial impact on State and local governments. Congress should closely monitor actions taken by State and local governments to improve the funding of their pension plans to determine whether, and at what point, congressional action may be necessary to prevent fiscal disaster and to protect the rights of employees and their dependents.