Selected SLC Research
Policy Analysis | April 20, 2016
Southern Legislative Conference (SLC) States and the Annual Required Contribution (ARC) to Public Pension Plans
Among the myriad fiscal challenges confronting states is adequately funding their public pension plans. The most important way states carry out this function is by making the Annual Required Contribution (ARC) toward the public pension plan, an appropriation designated to cover the benefits accrued that year and to pay down a portion of any liabilities that were not funded in prior years. Since 1994, when the Governmental Accounting Standards Board (GASB) introduced the concept of the ARC, policymakers and those reviewing the performance of public pension plans have often looked to a state’s ARC to determine their commitment in bolstering the funding position of their pension plans.
In determining the ARC for a public pension plan, experts and actuaries calculate expected revenues flowing into the plan from several sources, such as investment earnings and employee contributions, and then alert policymakers about the precise ARC number based on actuarial and other calculations. The legal foundation for states continuing to make their ARCs flow from a variety of sources including statutes, ordinances, bound rules, case law and, in certain instances, state constitutions. For most states, there is an implicit or explicit legal obligation that the ARC will be paid in full. In addition, some state laws require that any increase in either benefits or employee contributions have to be approved by the appropriate authorities, in some instances the state legislative body, in that state. In the past three or so years, the credit rating agencies have started paying a great deal of attention to ARCs and the funding position of public pension plans. In fact, these rating agencies have indicated that the funding ratio of the public pension plan in question remains one of the factors considered when determining the overall credit rating of that particular state or local government.
In recent years, there has been a great deal of scrutiny of the funding position of public pension plans. This scrutiny usually involves the performance of the state and local government in regularly and reliably making their ARCs to fund their pension plans. Recent research on this topic indicates that most states have made a diligent effort to fund their pension plans through the ARC. A study by the National Association of State Retirement Administrators (NASRA), released in March 2015 of 112 state-sponsored and statewide plans between fiscal years 2001 and 2013, demonstrated that on a weighted average basis, the median ARC experience is 95.1 percent. Specifically, this study revealed that one-half of the plans received at least 95.1 percent of their ARC. In addition, the study reached the following conclusions:
- All but two states (New Jersey and Pennsylvania) paid at least one-half of their ARC;
- All but six states (Washington, North Dakota, Kansas, Colorado, Virginia and Illinois) paid at least 75 percent of their ARC;
- The average plan received 89.3 percent of its ARC; and
- The weighted average ARC for all 50 states was 84.4 percent, i.e., of the $779 billion of combined ARC that states were anticipated to appropriate to the different plans, the states provided $657 billion.
In terms of the SLC states, their ARCs have been most impressive. Table 1 below provides details on the ARC experience for the region between fiscal years 2001 and 2013.
(click on headers to sort by column)
|State||Weighted ARC Average (Percent)||(Shortfall) or Surplus (In Dollar Millions)||Approximate ARC Paid in FY 2013 (In Dollar Millions) *|
|Weighted Average for SLC||94.2|
|Weighted Average for U.S.||84.3|
* Please note that the ARC contribution paid in fiscal year 2013 is an extremely approximate number and should not be construed as the final amount paid by the state. This number was tabulated from the bar graphs presented on the following pages.
As evident in Table 1, the record of the SLC states is quite notable, with six states contributing an amount either equal or greater than the ARC during the review period. The weighted average for the SLC region also is considerably higher than national average (94.2 percent versus 84.3 percent).
The bar charts below provide details on the ARC experiences in the SLC states for the fiscal year 2001 to 2013 period by highlighting the percent of the ARC received, the dollar amount paid for the ARC and the ARC in dollars. These bar charts reflect trends associated with the ARCs specified by the actuaries and the payments made by the SLC member states. Many of the states have done a laudable job of meeting their ARCs, though there are instances when in certain years, an SLC state failed to make this contribution. In fact, a review of the 12 years represented in the bar graphs indicates that there was only a single instance where an SLC state (North Carolina in fiscal year 2003) failed to make its ARC. In subsequent years, North Carolina remedied this lapse and continues to have an ARC average that is higher than both the national and SLC average.
- National Association of State Retirement Administrators (NASRA), The Annual Required Contribution Experience of State Retirement Plans, FY 01 to 13, March 2015.
- Governmental Accounting Standards Board, Statements 25 and 27
- National Association of State Retirement Administrators (NASRA), Pension Funding: A Guide for Elected Officials
- Center for Retirement Research, The Miracle of Funding State and Local Pension Plans