U.S. public defined benefit plans are taking on more investment risk than they have in the past, raising the prospect of a funding crisis and increased pension contributions if returns are low, said officials at the Nelson A. Rockefeller Institute of Government in a presentation prepared for the National Conference of State Legislatures Legislative Summit in Chicago.
According to the presentation documents, just less than 65% of total investible public DB assets were invested in equity-like investments in 2015, down from a high of about 65% in 2013 but up from where it was in each of the previous five decades (roughly 60% in 2005, 54% in 1995, 30% in 1985, 19% in 1975 and 7% in 1965).
“These investments might return high yields, but they might not, and the risk they pose can lead to crises that would impose severe costs on taxpayers and other government stakeholders,” said Robert Bullock, deputy director for operations, in a news release on the presentation.
In 2014, total state and local government pension contributions fell $16.5 billion short of actuarially required contributions, with 33 plans underpaid by $100 million or more, according to the institute.
The presentation materials also noted that public pension underfunding, totaling $1.8 trillion, as a percentage of taxes is now about 113%, up from where it was in each of the previous four decades (2000 marked the lowest reading at just below -60%).
While underfunding remains, government pension contributions have increased in aggregate. Between 2000 and 2015, public pension fund contributions as a percentage of state and local taxes rose 3.9 percentage points to 8.5%. Between 2007 and 2015, government contributions increased 59 cents for every $1 increase in tax revenues.
The presentation, delivered by Donald J. Boyd, director of fiscal studies, and Yimeng Yin, research analyst and programmer, at the Rockefeller Institute of Government is available on the institute's website.