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In this brief, the authors examine the funding status of 150 state and local plans from the Public Plans Database. The authors found that the funding status of the plans stayed the same in 2013, despite strong recent stock market returns and states paying an increased share in annual required contribution (ARC) payments. In both 2012 and 2013, the aggregate funded ratio for state and local plans was 72 percent. Strong stock market returns were offset by modest plan asset growth, whose values include negative returns from the financial crisis.    

The authors project funded ratios for 2014-2017 using new accounting standards from the Governmental Accounting Standards Board (GASB). The new GASB standards go into effect in 2014, and include two key changes. First, GASB recommends reporting assets using the current market value. Second, GASB recommends discounting future benefit payments using a combined rate that reflects the returns on liabilities and municipal bonds. The authors project that using market assets alone will increase funded ratios in 2014–17 because market assets are expected to exceed actuarial assets. However, using a combined rate and market assets lowers the long-run expected return on assets and leads to lower funded ratios in 2014-17.

The authors conclude that a healthy stock market will continue to improve plan funding, and may go up to 80 percent or more in 2017. But funded ratios will go down if plans uses a combined rate to discount their projected benefit payments.