State and Local Pension Costs: Pre-Crisis, Post-Crisis, and Post-Reform
States have begun to respond to their pension challenge by enacting a mix of revenue increases and benefit cuts. These changes will, over time, improve the financial outlook for plans and help ease their impact on other budget priorities. But, to date, the specific nature and magnitude of these effects on plan finances and overall state budgets has received little attention.
This brief reports on a study designed to fill the void with an analysis of pension costs before the
financial crisis, after the financial crisis, and after reforms for a sample of 32 plans in 15 states. The study also introduces a companion series of fact sheets on each of the sample plans and states.
The discussion is organized as follows. The first section describes the data and methodology used in the analysis. The second section reports the activity at the plan level with the presentation of the annual required contribution (ARC) as a percent of payroll before the 2008 financial crisis, after the financial crisis, and after reforms. The third section quantifies the budgetary impact of pensions for the state as a whole by looking at the ARCs as a percent of state-local own-source revenues. It also assesses the additional cost burden of retiree health plans and describes a sensitivity analysis that tests the effects of higher or lower asset returns on the pension projections. The final section concludes that most of the sample plans responded with significant pension reforms, generally increasing employee contributions and lowering benefits for new employees. The changes were largest for plans with serious underfunding and those with generous benefits. In most cases, reforms fully offset or more than offset the impact of the financial crisis on the sponsors’ ARC, and employer contributions to accruing benefits for new employees were cut in half. In short, states have made more changes than commonly thought. Whether these changes stick or not is an open question.