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The Impact of Public Pensions on State and Local Budgets

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Publication Date:

Publisher(s): Center for Retirement Research at Boston College

Author(s): Alicia H. Munnell; Jean-Pierre Aubry; Laura Quinby

Series:

Special Collection:

Topic: Economics (Economic conditions)
Economics (Economic research)

Keywords: State and Local Pensions

Type: Report

Coverage: United States

Abstract:

State and local pensions have been headline news
since the financial collapse reduced the value of their
assets, leaving a substantial unfunded liability. The
magnitude of that liability depends on the interest
rate used to discount future benefit promises but,
regardless of the assumptions, states and localities
are going to have to come up with more money. This
brief looks at the size of the additional funding relative
to state budgets.

The brief proceeds as follows. The first section
provides an overview of state and local plans and introduces
our sample of six states: California, Florida,
Georgia, Illinois, Massachusetts, and New Jersey. The
second section presents data on pension expenditures
relative to budget totals for states and localities
in the aggregate and for our sample of plans. The
third section develops baseline budgets for the period
2010-2043 for all states and localities and for the six
individual states. It then projects annual required
pension contributions beginning in 2014 under three
scenarios: 1) amortizing the unfunded liability valued
at an 8-percent discount rate over the next 30 years;
2) amortizing the unfunded liability valued at 5 percent
over the next 30 years; and 3) continuing to pay
contributions at current levels until the trust fund is
exhausted and then paying benefits on a pay-as-you-go
basis.

The final section concludes that whereas public
plans are substantially underfunded, in the aggregate
they currently account for only 3.8 percent of state
and local spending. Assuming 30-year amortization
beginning in 2014, this share would rise to only 5.0
percent and, even assuming a 5-percent discount
rate, to only 9.1 percent. Aggregate data, however,
hide substantial variation. States that have seriously
underfunded plans and/or generous benefits, such
as California, Illinois, and New Jersey, would see
contributions rise to about 8 percent of budgets with
an 8-percent discount rate and 12.5 percent with a
5-percent discount rate.