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Status of States Making Pension Payments

January 13, 2012

A public pension plan’s annual required contribution, or ARC, reflects the amount a state (or locality) needs to set aside to fund benefits accrued in the current period (the normal cost) plus the amount needed to retire the plan’s unfunded liability over the plan’s funding period.

Another way to think of it is a mortgage payment. While the life of the mortgage may be 30 years, it is paid in monthly installments that are amortizing the obligation. The ARC is the same type of payment: the normal cost is akin to the mortgage principle, and the unfunded liability is analogous to interest on the debt.

Failing to make payments on a mortgage leads to higher costs later on, and can lead to foreclosure. For a public pension fund, failing to make payments can lead to trouble by increasing unfunded liabilities – which is why lawmakers want to defend whether they did make their payments.

As per the 2010 Public Fund Survey [pdf], the displayed chart measures the overall average ARC paid, and the percentage of plans receiving at least 90 percent of the ARC.

In Fiscal Year 2010, the overall average ARC received by public plan sponsors (e.g., state or local governments) was 88 percent, within the range of levels in recent years. Similarly, the percentage of plan sponsors paying at least 90 percent of their ARC also was consistent with recent experience.

Both rates, however, were lower for the second consecutive year. While not flat-lined, the decrease likely reflects a combination of a higher amount needed for the payment, due chiefly to the effects of the 2008-09 market decline, and the ongoing difficult fiscal conditions states and their political subdivisions have faced since the recession that began in late 2007.

Something to watch in 2012 is what happens to the ARC. The Governmental Accounting Standards Board (GASB) is proposing to eliminate it, which would likely result in confusion and a lack of accountability in terms of policymakers’ ARC decisions.

Read more:

Center for Retirement Research at Boston College: “How Would GASB Proposals Affect Public Pension Funding Levels?

NASRA Issue Brief: State and Local Spending on Public Retirement systems [pdf]

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