You need money to make money, and the programs long in trouble didn’t have enough assets on hand to take full advantage of a banner year. Say your plan started 2021 with a funding level of 80 percent (meaning you had enough assets to cover 80 percent of your anticipated liabilities). With a 30 percent return, your plan would then be 104 percent funded. But if you only started with a 30 percent funding level, the same percentage gain would bump you up only to 39 percent funded.
“The problem of a deeply underfunded plan is that they don’t have a lot of assets, so big returns aren’t as helpful to them,” says Donald Boyd, co-director of the Project on State and Local Government Finance at the University at Albany. “They’ve still got a huge way to go.”
Maintaining discipline has been hard. When pension plans have a good year, as in 2021, there’s a temptation for legislators to skip contributions. This would be akin to an individual seeing her retirement account gain $10,000 and figuring she can skip that year’s $5,000 contribution.
The problem is that you have to maximize your gains in good years, not fritter them away, because inevitably you’re going to have to make up for bad years at some point. “When politicians have a lot of money around, they tend not to put it in the fund,” says the Urban Institute’s Johnson. “When things are bad, they kick the burden down the road and let future taxpayers worry about it.”
Author(s): Alan Greenblatt
Publication Date: 25 Jan 2022
Publication Site: Governing