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Market Extra: U.S. public sector pension funding improved during the pandemic year


What a difference a year makes.

In May of 2020, things looked dire for states and local governments, and many analysts were nervous about the state of public sector pension funding.

But 13 months later, the worst fears about municipal budgets haven’t panned out, Washington is pushing billions of dollars of fiscal stimulus money downstream, and stock market returns have trounced what even the most bullish analysts expected.

Taken together, it means that the funded status of public pension plans has improved, according to a report from one of the most closely-watched groups tracking pensions. The Center for Retirement Research at Boston College’s 2021 update estimates the aggregate level of funding among public-sector plans at 74.7%, up from 72.8% last year.

The “funding status” of a pension plan refers to how many assets it has on hand, compared to its current and future liabilities when employees retire. Public-sector pensions get inputs from employee paychecks and from employer contributions.

But they also rely on gains from their investments. Compounded over many years, those gains (or losses) account for roughly 2/3 of overall pension returns. Over the past year, stocks have surged: the S&P 500 index

gained 79% from its 2020 nadir. That’s been a boon for many retirement plans. The New York State Common Retirement Fund saw a 33.5% return for its fiscal year ending March 31, the largest in its history, while the Arkansas Teacher Retirement System gained 38.8%.

Even so, the aggregate contribution that state and local governments must make rose during the past year, to 22% of payroll, from 21.3%. That’s largely because of the enormous loss of workforce as a result of the crisis, the BC researchers note. Governments cut nearly 1.5 million workers in the six month span from March to August 2020, which is roughly the same number of layoffs throughout the 2008-2009 recession.

Contribution rates must rise because the payroll base has shrunk.

Read next: Local-government employment in the U.S. is at a 19-year low

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