The excess of actuarial accrued  liabilities over the actuarial value of assets is referred to as the “unfunded  actuarial accrued liability” or “unfunded liability.” Under accounting  standards, such information is disclosed in financial statements. Oversight of State and Local Retiree Benefits

The federal government has an interest in the funded status of state and  local government retiree pensions and health care, even though it has not  imposed the same funding and reporting requirements as it has on private  sector pension plans. To  help clarify, we found that three measures are key to understanding  pension plans’ funded status. Comparing this amount to the amount governments actually contribute  indicates how well governments are keeping up with yearly funding needs. In addition, governments have been reporting these  funded status measures for pensions for years. However, the new  accounting rules will also call on governments to report the funded status  of retiree health benefits in a similar manner, even though many have not  made any contributions to build assets to cover liabilities. The funded ratio  indicates the extent to which a plan has enough funds set aside to pay  accrued benefits. Unfunded liabilities  will eventually require the government employer to increase revenue,  reduce benefits or other government spending, or do some combination of  these. Nevertheless, we found that  unfunded liabilities do not necessarily imply that pension benefits are at  risk in the near term. Current funds and new contributions may be  sufficient to pay benefits for several years, even when funded ratios are  relatively low. Most Public Pensions Have Assets to Pay Benefits over Several Decades, Though Contributions Vary, While Unfunded Liabilities for Retiree Health Are Significant

More than half of public pension plans reported that they have put enough  assets aside in advance to pay for benefits over the next several decades,  while governments providing retiree health benefits generally have  significant unfunded liabilities. Our  analysis of the PFS data on 65 self-reported state and local government  pension plans showed that 38 (58 percent) had a funded ratio of 80 percent  or more, while 27 had a funded ratio of less than 80 percent. Some Pension Sponsors Do Not Contribute Enough to Improve Funding Status

A number of governments reported not contributing enough to keep up  with yearly costs. Unfunded Retiree Health Liabilities Are Large for Many State and Local Governments

Our review of studies estimating the total retiree health benefits for all  state and local governments showed that liabilities are between $600  billion and $1.6 trillion. Others may have large unfunded liabilities. Compared to the future payments for pension benefits, payments  for health care benefits are significantly more unpredictable. However, the new GASB accounting standards will require  state and local governments to report their funding status on an accrual  basis. Appendix I: Objectives, Scope, and Methodology

The objectives of this report were to examine 1) the key measures of the  funded status of retiree benefits and 2) the current funded status of state  and local pension and retiree health benefits. Limitations of this study include: includes states only in the  analysis, not local jurisdictions; assumes that those government entities  for which Cato was able to find estimates of future retiree health  benefit obligations were representative of governments overall in terms  of age distribution and funding levels; does not consider the variation  in actuarial assumptions and methods between the different plans; it is  not clear how many employees were covered by the sample because  there were so many localities; and figures on the percentage of  employees covered by health care plans in state and local government  jurisdictions may not be precise.
Why GAO Did This Study

Pension and other retiree benefits for state and local government employees represent liabilities for state and local governments and ultimately a burden for state and local taxpayers. Since 1986, accounting standards have required state and local governments to report their unfunded pension liabilities. Recently, however, standards changed and now call for governments also to report retiree health liabilities. The extent of these liabilities nationwide is not yet known, but some predict they will be very large, possibly exceeding a trillion dollars in present value terms. The federal government has an interest in assuring that all Americans have a secure retirement, as reflected in the federal tax deferral for contributions to both public and private pension plans. Consequently, the GAO was asked to examine: 1) the key measures of the funded status of retiree benefits and 2) the current funded status of retiree benefits. GAO analyzed data on public pensions, reviewed current literature, and interviewed a range of experts on public retiree benefits, actuarial science, and accounting.

What GAO Found

Three key measures help to understand different aspects of the funded status of state and local government pension and other retiree benefits. First, governments' annual contributions indicate the extent to which governments are keeping up with the benefits as they are accumulating. Second, the funded ratio indicates the percentage of actuarially accrued benefit liabilities covered by the actuarial value of assets. Third, unfunded actuarial accrued liabilities indicate the excess, if any, of liabilities over assets in dollars. Governments have been reporting these three measures for pensions for years, but new accounting standards will also require governments to report the same for retiree health benefits. Because a variety of methods and actuarial assumptions are used to calculate the funded status, different plans cannot be easily compared. Currently, most state and local government pension plans have enough invested resources set aside to keep up with the benefits they are scheduled to pay over the next several decades, but governments offering retiree health benefits generally have large unfunded liabilities. Many experts consider a funded ratio of about 80 percent or better to be sound for government pensions. We found that 58 percent of 65 large pension plans were funded to that level in 2006, a decrease since 2000. Low funded ratios would eventually require the government employer to improve funding, for example, by reducing benefits or by increasing contributions. However, pension benefits are generally not at risk in the near term because current assets and new contributions may be sufficient to pay benefits for several years. Still, many governments have often contributed less than the amount needed to improve or maintain funded ratios. Low contributions raise concerns about the future funded status. For retiree health benefits, studies estimate that the total unfunded actuarial accrued liability for state and local governments lies between $600 billion and $1.6 trillion in present value terms. The unfunded liabilities are large because governments typically have not set aside any funds for the future payment of retiree health benefits as they have for pensions.