State, county and municipal pension plans should use fair-value accounting and change how they determine contributions, according to a Congressional Budget Office brief.
The CBO brief, “The Underfunding of State and Local Pension Plans,” suggests that actuarial guidelines be replaced with a fair-value approach that uses a discount rate based on future cash flows. Although the fair-value approach would increase overall estimated public plan unfunded liabilities from a currently estimate of $700 billion in unfunded liabilities in 2009 to $2 trillion to $3 trillion, the CBO found.
Fair value “provides a more complete and transparent measure” of pension obligations, but also more challenges, the CBO noted, including further strain on government budgets and shakier reporting. Still, it found that “on average, a much smaller increase in funding might turn out to be sufficient to cover pension plans' liabilities,” but did not offer further details.
The additional funding “is likely” to come from higher taxes, reduced services or higher contributions from future workers, which are all unpopular choices, the CBO noted. “But the longer they wait, the larger those shortfalls could become.”
The report said public plans average less than 80% funded status. Two other recently released reports on funding ratios shed further light on the issue. A National Conference on Public Employee Retirement Systems survey showed an average funding ratio of 75.7% as of Dec. 31, while the Pew Center on the States put the number at 78% as of June 30, 2009.
The CBO based its analysis on the Public Fund Survey of 126 state, county and municipal pension plans. That survey covers 85% of assets and participants in state and local plans, which in 2009 had roughly $2.6 trillion in assets and $3.3 trillion in liabilities.
The report comes amid congressional skirmishing over whether greater federal oversight of state and local pension plans is warranted. At a House Ways & Means Oversight Subcommittee hearing Thursday, Republicans questioned whether state and local plans needed stronger accounting rules, while Democratic panel members noted that most plans are addressing underfunding and do not need federal intervention.