United States General Accounting Office

GAO Report to Congressional Requesters

March 1996 PUBLIC PENSIONS

State and Local

Government

Contributions to

Underfunded Plans

G O A

years

1921 - 1996

GAO/HEHS-96-56

GAO United States

General Accounting Office

Washington, D.C. 20548

Health, Education, and

Human Services Division

B-262220 

March 14, 1996

The Honorable Nancy L. Johnson

Chairman, Subcommittee on Oversight

The Honorable Sam M. Gibbons

Ranking Minority Member

Committee on Ways and Means

House of Representatives

Over 13 million state and local government employees expect to receive

the pension benefits they have earned. If their employers are not currently

on track to fully funding these pensions, some employees may ultimately

receive less than expected unless additional revenues are provided.

Oversight or other protections for beneficiaries of state and local pension

plans derive principally from the state and local laws that created such

plans, their administration by state and local agencies, and ultimately their

enforcement by the courts. Although federal pension laws impose funding

requirements on private pension plans, they impose no such requirements

on state and local plans.

This report responds in part to your request that we review the status of

public pension plan funding. It focuses on the basic pension plans of state

and local governments. Another report examines state and local

supplemental retirement programs, such as section 401(k) or 457 plans,

and a third report examines federal pension plans.1

Regarding state and local pension plans, you asked us to provide

information on the implications of underfunding. In addition, you asked us

to provide recent data about the (1) funding status of such plans; (2) status

of contributions to such plans, particularly underfunded plans; and

(3) changes in the funding and contribution status over time.

To address your concerns, we researched and examined studies and

literature on state and local government funding of pension plans. In

particular, we analyzed data assembled by the Public Pension

Coordinating Council (PPCC) from a survey representing 451 state and local

pension plans that covered 76 percent of the active participants of such

plans. Data for 1992 were the most recent available; we compared these

1

See our forthcoming report on section 457 plans (GAO/HEHS-96-38); Public Pensions: Summary of

Federal Pension Plan Data (GAO/AIMD-96-6, Feb. 16, 1996).

Page 1 GAO/HEHS-96-56 State and Local Pension Funding
B-262220 

data with 1990 data from an earlier PPCC survey. We did not make any

adjustments to the data reported by the plan sponsors. We also

interviewed officials of selected plans. We performed our work from

June 1995 through November 1995 in accordance with generally accepted

government auditing standards. (See app. I for more information on our

scope and methodology.)

Results in Brief Although state and local governments rarely become insolvent or cease to

operate, those with underfunded pension plans may face difficult budget

choices in the future if they do not work toward full funding. Their future

taxpayers will face a liability for benefits earned by current and former

government workers, leaving these governments to choose between

reducing future pension benefits or raising revenues.

Funding of state and local pension plans has improved substantially since

the 1970s. After adjusting for inflation, the dollar amount of the unfunded

liability has decreased by roughly half. Still, in 1992, 75 percent of state

and local government pension plans in the PPCC survey were underfunded;

38 percent were less than 80-percent funded.

Sponsors of slightly more than half of plans in the PPCC survey made

contributions that kept on schedule for paying off any unfunded liability.

One-third of the pension plans, however, were both underfunded in 1992

and not receiving the actuarially required sponsor contributions. Of all

plans with complete data, one-fifth were both underfunded and not

receiving full contributions in both 1990 and 1992.

Background In late 1992, about 13 million workers and retirees participated in state and

local government pension plans. Eighty-seven percent of state and local

full-time employees participated in defined benefit plans, while 9 percent

participated in defined contribution plans. Some employees participated in

both; 93 percent participated in one or the other.

In a defined benefit plan, benefits are established by a formula that is

generally based on such factors as years of employment, age at retirement,

and salary level. Employers and employees in most state and local plans

contribute to a fund from which these defined benefits will be paid.

Actuaries calculate the size of the fund that will be needed to pay these

benefits on the basis of projections of fund investment earnings, mortality,

and other factors. If the fund’s assets are less than the projected liabilities,

Page 2 GAO/HEHS-96-56 State and Local Pension Funding
B-262220 

the plan is generally considered to be underfunded. Actuaries also

calculate the contribution amount needed to cover the liability that

accrues each year and to pay an installment on any unfunded liability.

Thus, if a plan sponsor is making these actuarially required contributions,

the plan can be underfunded yet still on track toward full funding.

In contrast, a defined contribution plan, such as a 401(k) or 457

supplemental retirement account, sets the amount contributed to

individual worker accounts. The balance in such an account at retirement,

reflecting total contributions and investment earnings, determines the

worker’s retirement benefit. Thus, by definition, such a plan cannot be

underfunded in an actuarial sense.

Oversight of State and

Local Plans

For private-sector pension plans, the Employee Retirement Income

Security Act of 1974 (ERISA) ensures that most promised employee benefits

will be paid. If a company goes out of business and leaves its defined

benefit pension plan without adequate funds, the business no longer has

earnings with which to make further contributions to cover its pension

obligations. Among other things, ERISA insures pension benefits against

insufficient funding; the Pension Benefit Guaranty Corporation (PBGC)

assumes the liability and assets of terminated private pension plans and

pays the retirement benefits, subject to certain limits. ERISA also requires

that plan investments be diversified and funded on a sound actuarial basis

and that plan fiduciaries adhere to certain standards of conduct. Further,

ERISA establishes a framework for enforcing its provisions involving three

federal agencies: the Department of Labor, the Internal Revenue Service,

and the PBGC.

ERISA does not apply, however, to state and local pension plans, nor does

federal law impose funding requirements on them.2

 Instead, state and local

pension plans are created and governed by laws of their respective

governments, which specify any funding or other requirements. These

laws, their administration by state and local government agencies, and

ultimately their enforcement by the courts provide any protections the

beneficiaries may have. For example, in all 50 states, statutes include

provisions for fiduciary standards; in about half of the states, these

provisions are similar to ERISA’s. Also, about half restrict the types of

investments that can be made. In addition, annual contributions to

2

However, participants of government pension plans do enjoy tax deferral on contributions and

investment earnings. To qualify for this tax deferral, plans must adhere to federal rules, including ones

on coverage, participation, nondiscrimination, integration with Social Security, benefit distribution,

and operating for the exclusive benefit of plan members.

Page 3 GAO/HEHS-96-56 State and Local Pension Funding
B-262220 

56 percent of state and local pension plans are required to be actuarially

based; for 40 percent of these plans, statutes set a specific contribution

level, which in most cases is periodically adjusted to achieve actuarial

balance, according to a state pension official. In addition, the plans are

subject to review by state and local governmental audit agencies and

legislative oversight committees.

Moreover, the Governmental Accounting Standards Board (GASB) sets

accounting and reporting standards for state and local governmental

entities, including pension plans. Most state and local governments adhere

to these standards. GASB will soon require the reporting of a 6-year funding

and contribution history for pension plans and, for plan sponsors, the

reporting of a measure of the difference between actuarially required and

actual contributions. According to a PPCC analyst, such reporting should

provide further impetus to improve funding and contributions.

At times, perceptions arise that a state or local government is redirecting

funds from a pension plan to meet other budgetary needs. For example,

since 1992 California has attempted to delay its annual contributions of

roughly $500 million by more than a year, costing its Public Employees’

Retirement System as much as $50 million per year in interest. In other

states, such as New York and New Jersey, the legislatures have attempted

to change certain actuarial assumptions to lower contributions.3

 Also,

several state legislatures have encouraged pension managers to invest

some portion of plan assets in ways that will promote economic

development as long as these investments are sound. Some critics raise

concerns that such targeted investments often are not sound, citing certain

bad investments that lost millions.4

 For example, in 1990, Connecticut’s

pension plan invested about $25 million in Colt Industries, which in 1992

declared bankruptcy; the pension plan lost $21 million.

State and local government plans nevertheless operate in public view, and

some plan fiduciaries and others have filed suits against plan sponsors.

3

The pension plan sponsor’s actuarially determined annual contribution is particularly sensitive to

changes in the underlying assumptions. For example, a small change in the assumed rate of return on

plan investments can produce a large change in calculated pension liabilities and, in turn, in the annual

contribution needed from the employer; a 1-percentage point increase in the assumed investment

return rate, with other assumptions remaining the same, could result in a 20- to 25-percent reduction in

the required annual contribution.

It is noteworthy, however, that changing actuarial assumptions is not necessarily inappropriate. After

assessing pension fund performance and other factors, actuaries may change assumptions each time

they make a new valuation and recalculate contributions required from plan sponsors.

4

Public Pension Plans: Evaluation of Economically Targeted Investment Programs (GAO/PEMD-95-13,

Mar. 17, 1995).

Page 4 GAO/HEHS-96-56 State and Local Pension Funding
B-262220 

For example, according to pension officials and trade publications, in the

California case, a superior court judge ordered the state to make the

delayed contribution with accrued interest; the case is pending on appeal.

Similarly, New York’s highest court ruled that the New York law changing

the actuarial methodology for the public employees’ retirement system

violated the New York State Constitution, and the state has agreed to a

payment schedule that will make full restitution of missed contributions

by 1999. As of this writing, the other cases involving New York and New

Jersey are still pending in their respective courts. Regarding targeted

pension investments, while some such investments do not earn

competitive returns, others do.

Underfunding May

Present Future

Problems

Although incidents of insolvency or termination of state and local pension

plans are rare, underfunding of such plans may present governments with

difficult budget decisions in the future. If the actuarial value of a pension

plan’s liabilities exceeds its assets, a plan may still have enough funds to

pay benefits for many years. If such underfunding persists, however,

eventually—perhaps years in the future—the plan may lack enough funds

to pay benefits. At that time, the sponsoring government will need to have

made additional contributions to the pension fund. Or, a government may

change the law to reduce benefits or postpone benefit increases that offset

inflation, depending on the law that created the plan and the state

constitution or municipal charter that governs lawmaking. Thus, the ability

of state and local governments with underfunded plans to meet their

pension obligations at some future date will depend on balancing

competing budgetary demands and possibly on the willingness of their

taxpayers to meet the cost.

Moreover, if pension benefits are not fully funded, the fiscal burden of

providing for them can grow quickly as a share of the budget under

various circumstances. Benefit costs can increase rapidly if the number of

retirees surges. Also, government revenues can grow slowly if the tax base

decreases or tax rates are cut, even though promised benefits have already

been determined for years to come. In fact, the ratio of active workers to

retirees is declining in the state and local sector,5

 which means that the

cost of paying benefits for previous years’ employees is growing relative to

the cost of paying current employees. If benefits are not fully funded, the

relative fiscal burden of providing for them will grow as well. Also, the

5

1990 Comparative Study of Major Public Employee Retirement Systems, State of Wisconsin

Retirement Research Committee, Staff Report No. 79 (1990).

Page 5 GAO/HEHS-96-56 State and Local Pension Funding
B-262220 

prospect of such budgetary pressures can significantly affect the

sponsoring government’s bond ratings.

In addition to concerns that full benefits might not be paid as promised or

that the fiscal burden of doing so might be excessive, underfunding of

state and local plans implies that the cost of government has been partially

shifted from one generation of taxpayers to another. This year’s cost of

government includes the cost of pension benefits that employees earn with

this year’s work.

Underfunding can arise when pension contributions do not fully cover the

cost of pension benefits that workers earn in a given year. Underfunding

can also arise for other reasons, however, such as pension plan

investments’ not earning as high a return as projected. Actuarially required

contributions include an installment on the amount needed to amortize the

underfunded amount. Thus, undercontributing arises when the sponsoring

government is not paying enough either to cover the pension liability

incurred this year or to amortize this year’s share of the unfunded liability

or both.

A number of federal pension plans also have unfunded liabilities;6

however, arrangements have been made to fund the liabilities in the

future. More importantly, the funding status of federal pension plans does

not have the same implications as that of state and local plans. Unlike

state and local pension assets, the vast majority of federal pension assets

must by law be invested in nonmarketable U.S. Treasury securities. In

effect, federal pension assets largely represent government promises to

pay benefits, rather than investments that can be converted to cash. When

the Treasury pays benefits now or in the future, it must obtain the money

either from tax revenues or borrowing, regardless of the plans’ technical

funding status.

State and Local

Pension Underfunding

Has Decreased, but

Underfunded Plans

Remain

Although underfunding of state and local pensions has decreased

considerably since the mid-1970s, underfunded plans remain. The

unfunded liabilities of all state and local government pension funds then

totaled $150 to $175 billion,7

 according to the U.S. House of

Representatives Pension Task Force; adjusting for inflation, this equals

about $400 billion in 1992 dollars. In 1992, unfunded liabilities totaled

roughly $200 billion, according to our estimate from the PPCC sample.

6

Public Pensions (GAO/AIMD-96-6, Feb. 16, 1996).

7

The 1975 estimate is based on a different, more limited sample, so comparing it with our 1992

estimate has limitations. Still, the change in funding status is great.

Page 6 GAO/HEHS-96-56 State and Local Pension Funding
B-262220 

Thus, the unfunded liability has decreased by about half in constant

dollars. Also, in the mid-1970s, the funding ratio was roughly 50 percent.

The 1992 funding ratio for plans in the PPCC sample was 82 percent (see

table 1).8

 (The funding ratio is the proportion of pension liability9 covered

by the value of plan assets.)

Table 1: Funding Status of State and

Local Pension Plans, 1992 State Locala Total

Number of

plans

Funding

ratio

(percent)

Number of

plans

Funding

ratio

(percent)

Number of

plans

Funding

ratio

(percent)

Underfunded

plans

81 79 198 73 279 77

Fully

funded

and

overfunded

plans

25 117 72 116 97 117

All plans 106 85 270 77 376 82

aLocal plans include all plans not sponsored by a state.

Source: GAO Analysis of 1993 PPCC Survey.

Funding ratios vary widely, however. Of the plans that were underfunded

in 1992, 38 percent were less than 80-percent funded (see fig. 1). For

underfunded plans alone in the PPCC sample, total assets equaled

77 percent of liabilities.

8

Data are from the 1993 Survey of State and Local Government Employee Retirement Systems,

PENDAT survey for 1993, prepared by PPCC. Plans with complete funding data for 1992 represented

95 percent of all employees and 94 percent of all assets for the plans responding to the PPCC survey.

(See app. I for more detail.)

9

We used the actuarial accrued liability to measure plans’ pension liability. It is noteworthy that

funding ratios provide only general indications of funding status because public pension plans can use

different actuarial methods and assumptions, such as the assumed rate of return on plan investments.

(See app. I.)

Page 7 GAO/HEHS-96-56 State and Local Pension Funding
B-262220 

Figure 1: Distribution of State and

Local Pension Plans by Funding Ratio,

1992

Percentage

0

5

10

15

20

25

30

35

40

Less

Than 40

40 to

<60

60 to

<80

80 to

<100

100 to

<120

120

Percent Intervals of Plan Funding Ratios

5

11

22

37

17

9

Source: GAO Analysis of PPCC Survey.

State and Local

Government

Contributions Have

Fallen Short of

Actuarially Required

Amounts

In 1992, state and local government contributions to their pension funds

fell short of the actuarially required amounts; the contribution ratio was

88 percent for all plans in the sample with complete contribution data.10

The contribution ratio is the proportion of the actuarially required

contribution covered by actual contributions. (See table 2.)

10Plans with complete contribution data for 1992 represented 84 percent of all employees and

85 percent of all assets for the plans responding to the PPCC survey.

Page 8 GAO/HEHS-96-56 State and Local Pension Funding
B-262220 

Table 2: Contribution Status of State

and Local Pension Plans, 1992 State Locala Total

Number of

plans

Contribution

ratio

(percent)

Number of

plans

Contribution

ratio

(percent)

Number of

plans

Contribution

ratio

(percent)

Received

less

than full

contributions

50 69 100 73 150 69

Received

full

contributions

or more

46 105 151 106 197 105

All plans 96 84 251 99 347 88

aLocal plans include all plans not sponsored by a state. Local plans cover 26 percent of all

employees in state or local plans and 11 percent of employees in plans that received less than

full contributions. Thus, the contribution ratio for local plans does not have a large effect on the

ratio for all plans combined.

Source: GAO Analysis of 1993 PPCC Survey.

Underfunding of state and local government plans will not likely improve

if contributions fall short of actuarially required amounts, which are

calculated to cover currently accruing liabilities and also to help pay off

any existing unfunded liability. Inadequate contributions over the long

term could seriously erode the financial status of some plans, especially

those underfunded by large amounts.

Contribution ratios also varied widely in 1992. While 57 percent of plans

received full contributions, the remaining 43 percent had a combined

contribution ratio of just 69 percent, or nearly $4 billion less than the

actuarially required amount. About 15 percent of plans received less than

60 percent of required amounts. For state plans alone, over half received

less than full contributions, with nearly one-fourth below 60 percent of

required amounts.

Examining only the plans that were underfunded, 44 percent received less

than full contributions and 16 percent received less than 60 percent of the

required amount. About 55 percent of underfunded state plans received

less than full contributions, compared with 40 percent of underfunded

local plans. (See table 3.)

Page 9 GAO/HEHS-96-56 State and Local Pension Funding
B-262220 

Table 3: Contribution Ratios of

Underfunded Plans, 1992

Percentage of underfunded plans

In percent

Contribution ratio State Locala All plans

Less than 40 13.0 4.0 6.6

40 to less than 60 10.1 9.7 9.8

60 to less than 80 10.1 10.9 10.7

80 to less than 99 21.7 15.4 17.2

99 or more 44.9 60.0 55.7

Total 100.0 100.0 100.0

Note: Numbers in table may not add to the total due to rounding.

aLocal plans include all plans not sponsored by a state.

Source: GAO Analysis of 1993 PPCC Survey.

Recent Changes in

Funding and

Contribution Status

According to our analysis of the PPCC survey data, the funding status of

state and local pension plans improved between 1990 and 1992. The

contribution status of these plans worsened slightly, however, and a

significant share of plans underfunded in both years also received less

than full contributions in both years. Although the survey had complete

data for both years for only a subset of all survey respondents, this

analysis illustrates the plans’ varied experience and what can happen in

the worst cases.

For the plans with complete funding data for both years, the funding ratio

increased from 80 to 83 percent. For underfunded plans alone, the funding

ratio increased from 72 to 78 percent.11

For plans with complete contribution data for both years, the contribution

ratio decreased from 93 to 85 percent. For plans receiving less than full

contributions, the contribution ratio decreased from 62 to 60 percent.

Examining the distribution of plans by funding and contribution status

better reveals the potential for funding problems since each pension fund

11Of the 376 plans with complete funding data in 1992, 156 also had complete data in 1990. The funding

ratio for the 376 plans was 82 percent in 1992 compared with 83 percent for the 156 plans. Thus, the

plans with missing data tended to be similar in funding status.

The 376 plans covered 95 percent of the employees in plans that responded to the survey, while the 156

plans covered 62 percent of them. Contribution data had a similar pattern, though 143 plans had

complete contribution data in both years, covering 54 percent of employees. (See app. I for more detail

on the data set.)

Page 10 GAO/HEHS-96-56 State and Local Pension Funding
B-262220 

must meet its own obligations. Of the 156 plans with complete funding

data for both years, 97 plans increased their funding ratios, and the

number of underfunded plans dropped from 122 to 118. For the 143 plans

with complete contribution data for both years, the number of plans

receiving less than full contributions increased from 53 to 57.

Still, it may be perfectly appropriate for an overfunded plan to

undercontribute; underfunded plans that do so are the primary concern.

Of the 117 plans that had complete data for both years,12 90 were

underfunded in both years. Sponsors undercontributed to 28 of these in

one of the two years but not both and undercontributed to 25 in both

years. (See table 4.) Of the 25, 8 plans had funding ratios that decreased

between 1990 and 1992. Another three had level funding ratios. Thus,

nearly half of the 25 showed no improvement in their funding status.

Table 4: Recent Changes in Funding

and Contribution Status of Plans With

Complete Data, 1990 Versus 1992

Number of plans

Receiving full contributions

Underfunded

both years

Fully

funded 1

year or

both All plans

Neither year 25 3 28

1990 or 1992 28 10 38

1990 and 1992 37 14 51

Total 90 27 117

Source: GAO Analysis of 1991 and 1993 PPCC Surveys.

Even with undercontributing, funding ratios may improve for various

reasons, including strong returns on pension fund investments. Also, while

most of the underfunded plans without full contributions nevertheless

improved their funding status, their sponsors may not have been paying

off the unfunded liability exactly on schedule. Conversely, making the full

actuarially required contribution, including partial payment of the

unfunded liability, may not have been sufficient to improve funding ratios;

for example, investments may have returned less than estimated. Of the 37

plans that were underfunded yet fully contributing in both years, 9

nevertheless had decreasing funding ratios. This illustrates the value of full

funding in buffering against poor investment returns or other temporary

strains on the pension fund.

12Of the 504 plans responding in either year, 117 plans had both complete funding and contribution

data for both years. These 117 plans covered 42 percent of the employees covered by the 504 plans.

Page 11 GAO/HEHS-96-56 State and Local Pension Funding
B-262220 

Conclusions The funding status of state and local government pension funds has

improved substantially in the past 15 years. More than half of underfunded

plan sponsors are contributing enough to reduce their unfunded liability,

while the other plans are not.

Most significantly, one-third of state and local pension plans were both

underfunded in 1992 and receiving less than the actuarially required

sponsor contributions. Sponsors of underfunded plans who consistently

undercontribute will leave their plans with little buffer against possible

deterioration in the plans’ financial status. Such a deterioration could

arise, for example, from an increase in the number of retirees or poor

investment performance. As a result, sponsors create the potential for

difficult budget choices in the future and may implicitly shift to future

taxpayers part of the burden for paying today’s government workers.

Agency Comments The Chair of the PPCC’s Survey Committee and the administrator of the

PPCC database provided comments on a draft of this report. The PPCC

represents associations of finance and retirement officials from state and

local government. (See app. I for more detail.) Neither individual disputed

the accuracy of the data we presented, but both disagreed with some of

our specific conclusions.

The Survey Committee Chair commented that the report’s tone is not

balanced and would likely lead readers to think that public pension

underfunding is a larger problem than it really is. We do not agree that this

report is biased in tone or content. We clearly acknowledge that on the

whole funding has improved substantially. However, we also attempt to

focus attention on those underfunded state and local plans that may face

problems if undercontributing persists.

The administrator of the PPCC database suggested that only contribution

ratios of less than 90 percent be considered significant undercontributing.

He feels that relatively small levels of undercontributing often may reflect

differences between actual experience and actuarial projections and that

sponsors may compensate with overcontributions in other years. We

acknowledge that a small level of undercontributing in one year may not

significantly erode funding levels for a given plan, but we do not believe

we can arbitrarily specify a numerical value at which undercontributing

becomes significant in isolation from other factors.

Page 12 GAO/HEHS-96-56 State and Local Pension Funding
B-262220 

Ultimately, the critical question is whether undercontributing for a given

plan persists from year to year and whether its funding level improves or

worsens. Our 2-year analysis attempts to address this question, but,

unfortunately, the PPCC Survey does not yet have complete data for enough

plans for enough years to draw firm conclusions. Regarding this analysis,

PPCC’s database administrator also commented that it is not appropriate to

generalize from the relatively small number of plans that had complete

data for both years. We agree and, in fact, were careful not to generalize

from this 2-year analysis; we presented this analysis only to illustrate and

focus on the implications of persistent undercontributing.

In general, both commenters stated their view that the funding status of

state and local pensions is improving. One noted that GASB reporting rules

may provide further impetus to improve state and local plan funding and

contributions. Both commenters also had some technical comments,

which we have incorporated where appropriate.

As arranged with your office, unless you publicly announce its contents

earlier, we plan no further distribution of this report until 30 days from the

date of this letter. At that time, copies will be made available to others

upon request.

If you have questions concerning this letter, please call me on

(202) 512-7215. Other GAO contacts and staff acknowledgments are listed in

appendix II.

Jane L. Ross

Director, Income Security Issues

Page 13 GAO/HEHS-96-56 State and Local Pension Funding
Contents

Letter 1

Appendix I 

Scope and

Methodology

16

Appendix II 

GAO Contacts and

Staff

Acknowledgments

19

Tables Table 1: Funding Status of State and Local Pension Plans, 1992 7

Table 2: Contribution Status of State and Local Pension Plans,

1992

9

Table 3: Contribution Ratios of Underfunded Plans, 1992 10

Table 4: Recent Changes in Funding and Contribution Status of

Plans With Complete Data, 1990 Versus 1992

11

Table I.1: Information on PPCC Survey Data 17

Figure Figure 1: Distribution of State and Local Pension Plans by

Funding Ratio, 1992

8

Abbreviations

AAL actuarial accrued liability

ERISA Employee Retirement Income Security Act of 1974

GASB Governmental Accounting Standards Board

PBGC Pension Benefit Guaranty Corporation

PBO projected benefit obligation

PPCC Public Pension Coordinating Council

Page 14 GAO/HEHS-96-56 State and Local Pension Funding
Page 15 GAO/HEHS-96-56 State and Local Pension Funding
Appendix I 

Scope and Methodology

To analyze the current status of state and local pension plan funding and

contributions, we used data from the Public Pension Coordinating Council

(PPCC). Members of the PPCC include the

• Government Finance Officers Association,

• National Association of State Retirement Administrators,

• National Conference on Public Employee Retirement Systems, and

• National Council on Teacher Retirement.

The most recently available PPCC data were from their 1993 survey

representing the financial status primarily for fiscal year 1992. We

compared these data with a similar survey PPCC conducted in 1991,

representing the financial status primarily for fiscal year 1990.

Despite some limitations, the PPCC data are the best available, and

respondents to the 1993 survey represent 83 percent of the assets of all

state and local government plans and 76 percent of active plan members.

Following are the data limitations: (1) survey responses represent the

financial status for the fiscal year with the most recent actuarial valuation

and thus do not all represent the same fiscal year’s financial status; (2) the

samples are not random and therefore limit any generalization of results to

nonrespondents; (3) many responses lack complete funding or

contribution information; (4) the 1991 survey had fewer respondents than

the 1993 survey; and (5) the data represent the plans’ own estimates using

varied actuarial cost methods and assumptions.

For the 1991 survey, 73 percent of responses had data from fiscal year

1990, 18 percent from 1989, and the remainder from other years. For the

1993 survey, 68 percent of responses had data from fiscal year 1992,

19 percent from 1991, 8 percent from 1993, and the remainder from other

years.

PPCC sent its survey to all members of two of its member associations and

to a representative sample of members of the other two associations. PPCC

reported that one of its associations was especially helpful in ensuring

responses. Due to the nonrandom nature of this sample and the resulting

potential for bias, no analysis can offer any generalizations about

nonrespondents. Nor can confidence intervals be calculated. Nevertheless,

the survey covered a substantial majority of pension plan members and

assets. Thus the analysis describes the funding status of a large and

important portion of all plans and members.

Page 16 GAO/HEHS-96-56 State and Local Pension Funding
Appendix I 

Scope and Methodology

As noted in footnotes throughout the report, many respondents did not

provide complete funding data or contribution data or both. We can

calculate the number of employees represented by plans with complete

data, but we cannot generalize anything about the plans with incomplete

answers or assess any resulting bias in the results. Still, as the footnotes

detail, the plans with complete data generally represented a substantial

share of the employees in responding plans.

Table I.1: Information on PPCC Survey Data

1991 survey 1993 survey One or both surveys

Number of

plans

Number of

employees

represented

Number of

plans

Number of

employees

represented

Number of

plans

Number of

employees

represented

Responding to survey 271 9,140,285 451 9,945,551 504 10,825,468

With complete data for

Funding 185 7,205,524 376 9,420,708 156 6,702,879

Contributions 188 6,553,254 347 8,393,893 143 5,818,174

Both 150 5,240,075 318 7,976,721 117 4,597,509

The limitations of incomplete data were greatest for comparisons between

1990 and 1992. Therefore, we present this analysis primarily for

illustration.

We did not adjust the PPCC data to standardize actuarial cost methods and

assumptions. State and local governments may have many legitimate

reasons for choosing various cost methods and assumptions, and we did

not evaluate their choices. For example, among various investment

restrictions, some plans are not allowed to invest in stocks while others

are; therefore, plans’ assumed rate of return on investments should differ.

Change in Actuarial

Measures Used

In our previous analysis of this database,13 we used a measure called

projected benefit obligation (PBO) for the pension plans’ liabilities. At the

time, the Governmental Accounting Standards Board (GASB) required that

state and local plans report this measure. In 1994, GASB changed its policy

to require a measure called actuarial accrued liability (AAL), primarily

responding to many requests from plans that did not use the PBO measure.

Also, many officials felt that the PBO underestimates plan liabilities.

13Underfunded State and Local Pension Plans (GAO/HRD-93-9R, Dec. 3, 1992).

Page 17 GAO/HEHS-96-56 State and Local Pension Funding
Appendix I 

Scope and Methodology

In accordance with GASB’s change in policy, our current analysis also used

the AAL measure; the PPCC database includes both PBO and AAL data, when

reported. Our analysis confirmed that PBO generally yields higher funding

ratios and therefore suggests a lower degree of underfunding. Since our

previous analysis used the PBO measure and our current analysis used the

AAL measure, funding ratios and related statistics should not be compared

between the two reports. The trend analysis in this report, however, does

make a valid comparison over time, using AAL for both the 1990 and 1992

data.

Page 18 GAO/HEHS-96-56 State and Local Pension Funding
Appendix II 

GAO Contacts and Staff Acknowledgments

Contacts Donald C. Snyder, Assistant Director, (202) 512-7204

Acknowledgments The following individuals made major contributions to this report: Dea M.

Crittenden, Evaluator-in-Charge; Kenneth C. Stockbridge, Evaluator;

Lawrence Charron, Evaluator; and Sharon Fucinari, Computer Specialist.

(105686) Page 19 GAO/HEHS-96-56 State and Local Pension Funding
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