An Empirical Analysis of State and Local Public Pension Plan Funded Ratio Change, 2001-2009

Between 2001 and 2009, all public pension plans suffered losses and saw a drop in their funded ratios. However, some plans saw a much smaller decline than others. In this study, we explore why the ratios fared so differently during this tumultuous period for pension plans. By examining the changes in funded ratio for 84 large public pension plans, we find that the differences can be mostly attributed to variations in annualized investment return and changes in investment return assumption, and to a lesser extent, to the required contributions paid by employers, the contribution rates of employees, and cost-of-living adjustment provisions. The results suggest that pension plans seeking to improve their funded ratios may need to revise their investment strategies, pay a higher percentage of their required contribution, require employees to pay more toward their pension benefit, and limit the use of automatic or consumer price index–linked cost-of-living adjustments.