Trends in State and Local Pension Funds
Annual Review of Financial Economics, Volume 15, Forthcoming.
Stanford University Graduate School of Business Research Paper No. 4258469
35 Pages Posted: 31 Oct 2022
Date Written: October 19, 2022
Unfunded public pension obligations represent the largest liability for state and local governments in the United States. As of fiscal year 2021, the total reported unfunded liabilities of these plans is $1.076 trillion. In contrast, the market value of the unfunded liability is approximately $6.501 trillion. As a result, the reported funding ratio of 82.5% falls to 43.8% under a market-based valuation. The market values reflect the fact that accrued pension promises are a form of government debt with strong statutory and contractual rights. The assumed discount rates are based on expected returns and remain elevated relative to risk-free rates, despite a decline since 2014. As a result, not only is the unfunded pension liability understated, but also the yearly pension cost for newly accruing liabilities. In order to achieve high returns, pension funds have accumulated large exposure to risky assets, in particular alternative investments, which results in highly uncertain investment returns.
Keywords: Public Pensions, State and Local Government, Retirement Policies, Pension Cost, Government Debt
JEL Classification: H55, H75, J26, J45
Suggested Citation: Suggested Citation