1). GASB’s standards require  reporting financial information on pensions, such as the annual pension  cost, contributions actually made to the plan, and the ratio of assets to  liabilities. Plans Have Sufficient Assets to Pay Near- Term Benefits, but Growing Budget Pressures Will Challenge Their Sustainability

Although pension plans suffered significant investment losses from the  recent economic downturn, which was the most serious since the Great  Depression, most state and local government plans currently have assets  sufficient to cover their benefit commitments for a decade or more. 2). At the same time, data on individual plans indicate that this measure can  vary considerably across plans. Benefit increases were another important reason for the growing gap  between assets and liabilities over the past decade. For example, 11 states increased pension benefits in 2001  according to reports from the National Conference of State Legislatures. Plans Are Vulnerable to Pressures on State and Local Budgets

Fiscal pressures on state and local governments’ budgets add to the  challenges faced by plan sponsors and their ability to make adequate  contributions to their pension plans. As a result, higher pension contributions have been needed at the same  time state and local governments have faced added pressures to balance  their budgets. Based on our tabulation of state  legislative changes reported annually by NCSL, we found that the  majority of states have modified their existing defined benefit systems to  reduce member benefits, lowering future liabilities. Half of states have  increased required member (that is, employee) contributions, shifting  costs to employees. Some states and localities  have also taken action to lower pension contributions in the short term by  changing actuarial methods, and a few have issued pension bonds to  finance their contributions or to lower their costs by reducing the gap  between plan assets and liabilities. Three States Recently Adopted Hybrid Approaches, Reducing Risk for Plan Sponsors

Although a majority of states have continued to use traditional defined  benefit plans as their primary pension system, our analysis of NCSL  annual reports on recent pension legislation found that, since 2008, three  states—Georgia, Michigan, and Utah—have implemented hybrid  approaches as primary plans for large groups of employees, shifting  some investment risk to new employees. Some States and Localities Have Adjusted Pension Funding Practices, Potentially Increasing Future Costs

To address rising actuarially required pension contribution levels and  budget pressures, some states and localities have taken actions to limit  employer contributions in the short term or refinance their contributions. States and Localities Often Combine Strategies

States and localities often packaged multiple pension changes together. Whether the  state’s statutorily required contributions are funded through POBs or  general revenue does not directly affect the financial condition of the  pension system. Concluding Observations

State and local governments continue to experience the lingering effects  of investment losses and budget pressures in the wake of the recent  economic downturn. Although most large state and local government  pension plans still maintain substantial assets, sufficient to cover their  pension obligations for a decade or more, heightened concerns over the  long-term sustainability of the plans has spurred many states and  localities to implement a variety of reforms, including reductions in  benefits and increases in member contributions. Going forward, growing budget pressures will continue to  challenge state and local governments’ abilities to provide adequate  contributions to help sustain their pension plans and ensure a secure  retirement for current and future employees. Agency Comments

We provided officials from the Internal Revenue Service and the Social  Security Administration with a draft of this report. They provided technical  comments that we incorporated, as appropriate.
Why GAO Did This Study

Over 27 million employees and beneficiaries are covered by state and local government pension plans. However, the recent economic downturn and associated budget challenges confronting state and local governments pose some questions as to the sustainability of these plans, and what changes, if any, state and local governments are making to strengthen the financial condition of their pension plans. GAO was asked to examine
(1) recent trends in the financial condition of state and local government pension plans and
(2) strategies state and local governments are using to manage pension costs and the impacts of these strategies on plans, sponsors, employees, and retirees.
To address these topics, GAO analyzed various measures of sector-wide financial condition based on national-level data on pension funding from the U.S. Census Bureau and others, and reviewed information on recent state legislative changes affecting government pensions from annual reports prepared by the National Conference of State Legislatures (NCSL). GAO did not assess the soundness of individual plans, but did obtain documents and conduct interviews with pension and budget officials in eight states and eight localities, selected to illustrate the range of strategies being implemented to meet current and future pension funding requirement.
The Internal Revenue Service and Social Security Administration provided technical comments, which were incorporated, as appropriate.

What GAO Found

Despite the recent economic downturn, most large state and local government pension plans have assets sufficient to cover benefit payments to retirees for a decade or more. However, pension plans still face challenges over the long term due to the gap between assets and liabilities. In the past, some plan sponsors have not made adequate plan contributions or have granted unfunded benefit increases, and many suffered from investment losses during the economic downturn. The resulting gap between asset values and projected liabilities has led to steady increases in the actuarially required contribution levels needed to help sustain pension plans at the same time state and local governments face other fiscal pressures.
Since 2008, the combination of fiscal pressures and increasing contribution requirements has spurred many states and localities to take action to strengthen the financial condition of their plans for the long term, often packaging multiple changes together. GAOs tabulation of recent state legislative changes reported by NCSL and review of reforms in selected sites revealed the following:
Reducing benefits: 35 states have reduced pension benefits, mostly for future employees due to legal provisions protecting benefits for current employees and retirees. A few states, like Colorado, have reduced postretirement benefit increases for all members and beneficiaries of their pension plans.
Increasing member contributions: Half of the states have increased member contributions, thereby shifting a larger share of pension costs to employees.
Switching to a hybrid approach: Georgia, Michigan, and Utah recently implemented hybrid approaches, which incorporate a defined contribution plan component, shifting some investment risk to employees.
At the same time, some states and localities have also adjusted their funding practices to help manage pension contribution requirements in the short term by changing actuarial methods, deferring contributions, or issuing bonds, actions that may increase future pension costs. Going forward, growing budget pressures will continue to challenge state and local governments abilities to provide adequate contributions to help sustain their pension plans.