State, local plans see decline in funded status, required contributions

State and local pension plans' funded status and annual required contributions dropped in fiscal year 2011, albeit to a small degree, as pension reform measures continue to grow across the country, according to a review by Loop Capital Markets.

The weighted average funding ratio of state plans decreased one percentage point to 75% in fiscal year 2011, while the median ratio dropped to 73% from 76%. The average funding ratio of local plans decreased to 76% from 80%, while the median ratio fell to 79% from 81%, according to a conference call from Loop Capital on Tuesday.

The average and median annual required contributions decreased one percentage point to 85% and 89%, respectively, for state plans. On the local level, the average dropped two percentage points to 88%, while the median was 100%, up eight percentage points.

However, 18 of the 20 states that did not meet 100% of the ARC levels on an average weighted basis from 2007 to 2011 enacted significant pension reforms between 2009 and 2011; the other two, Ohio and Virginia, are in the process or already have enacted reform since then.

While a funded status of 80% has been viewed as a benchmark for a healthy plan, a state is “generally doing well” if it is above 70% funded, the ARC is greater than 80% and pension reform has been enacted, said Ann Kibler, vice president at Loop Capital Markets, in the conference call. Nine states were highlighted as fitting those criteria: Arizona, Arkansas, Georgia, Maine, Massachusetts, Michigan, Minnesota, Nevada and Vermont.

Ms. Kibler said reforms tend to have a greater impact when they involve reducing or eliminating the cost-of-living adjustment and increasing employee contributions; and that reducing contractual core benefits is more difficult to change because of legal challenges. She cited billions of dollars of projected savings in reforms in states such as California, Colorado, New Jersey, Rhode Island and Virginia.

Ms. Kibler expects to see reforms in Illinois' pension systems within the next year, a continued topic in the conference call. Illinois ranked last of all states with a 44% funding ratio, the only state lower than 55%. Of the 10 lowest funded states, Illinois also had the lowest ARC at 80%.

Sixteen states and the District of Columbia, had a funding ratio of greater than 80%, led by Washington, D.C., at 111% and Wisconsin, 100%.