A new report by the Lincoln Institute of Land Policy tries to shine a light on local government pension plans and how they fared during the Great Recession and after. According to the report, local plans represent a modest share of public pension fund membership (10 percent) and assets (18 percent), but the consequence of their failure could be catastrophic. These smaller pension plans are important because about one-quarter of government employees do not participate in Social Security. There are 3,196 locally administered plans in the U.S., and they are as well funded as their statewide counterparts. However, applying a lower discount rate and generalizing from the nation’s largest municipal plans (those with assets over $1 billion), researchers estimated aggregate unfunded liabilities of $574 billion. Authors of the report scanned news headlines for the first few months of 2012 and found that pension plans already are placing a burden on local budgets. The key issues going forward will be determining how local government employee pension costs affect current municipal cash flows and whether pension funding status is capitalized in local property values. State and local pension funds lost nearly half of the value of their investments in corporate equities from 2007 to 2009. As a result, the overall ratio of assets to liabilities in these funds dropped from 88 to 75 percent between 2007 and 2011. So even though the stock markets are recovering from the Recession, many pension funds are still doing badly because they have tried to smooth their investment gains and losses over several years. The report mentions two high-profile municipal bankruptcies in Stockton, California, and Central Falls, Rhode Island that came about in part because of the unfunded liabilities of their employee pensions and employee compensation in general. Forty-three states passed laws from 2009 to 2011 to shore up pension plan finances. Thirty states increased employee contributions, 32 raised age and service eligibility requirements, 17 adjusted formulas for calculating benefits and 21 reduced cost of living increases. Some changes have affected new hires, active workers and retirees. If these smaller local plans failed, it could impact entire communities, the report said. Mobile residents and businesses may flee higher property taxes if additional revenues are used to pay off pension legacy costs rather than to provide basic services. A shrinking tax base would leave the fund even worse off and less able to pay promised benefits, the report found. The result would be more cities like Prichard, Alabama, a town of about 20,000 that simply stopped sending pension checks in September 2009a nd declared bankruptcy one month later.
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