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Pension Funds

Local pension funds closing the gap with state plans

Higher returns, larger contributions allowing local plans to make up the difference in recent years

Local pension plans' funding ratios, which have long lagged behind those of state plans, are inching upward because of better investment returns and larger contributions than plans on the state level, according to a brief from the Center for Retirement Research at Boston College.

The aggregate funding ratios for 2015 for state plans and local plans (which include municipal and county plans) were 73.9% and 69.9%, respectively, the most recent data available. While state plans' aggregate funding ratio rose from 73.3% in 2013, that 60-basis-point increase fell behind local plans' increase of 290 basis points from an aggregate funding ratio of 67% in 2013.

The brief says while both state and local plans have received more than 90% of their reported actuarially required contributions since 2000, local plans have received slightly more since then. In 2000, state plans received 96% while local plans received 90%. In 2015, local plans received 94% and state plans received 92%.

Meanwhile, investment returns since 2013 have exceeded their return assumptions, as opposed to returns between 2000 and 2012. From 2000 to 2012, state and local plans' actual returns were 1.5 and 1.7 percentage points, respectively, below their assumptions. While both state and local plans have had good returns, local plans between 2013 and 2015 had returns 11.3 percentage points more than their assumptions, while state plans' returns were 9.1 percentage points above their assumptions.

The brief said the difference was attributed to both higher returns than state plans and because local plans assume slightly lower returns. The brief also noted that the higher returns for local plans could be due to their lower allocations to alternative investments. Among local plans, the average allocation was 20% in 2015 compared to 26% for state plans.

The brief used data from its Public Plans Database on 114 state plans and 55 local plans, as well as data from other sources for an additional 75 local plans.