Local governments face growing challenges in funding their pension obligations, in large part because of the financial crisis of 2008–2009. The economic downturn reduced the value of equities in all retirement plans, causing an increase in the unfunded liabilities of state and local public sector defined benefit plans; for the 126 public pension plans in the Public Plans Database, the 2010 unfunded liability was $0.8 trillion.

Despite two years of good investment returns since the financial meltdown, a number of factors will make it difficult to quickly restore healthy pension funding levels:

• Economic uncertainties continue.
• Legal barriers prevent instantaneous changes.
• Most defined benefit pension plans recognize gains and losses over a three- to five-year period, so the 2008–2009 losses will be “smoothed” over a number of years.

Getting pension funding back on track may take years, especially if outdated policies or other legal barriers stand in the way of change. Local governments that want to improve pension funding should (1) focus on recruiting and retaining good employees (rather than on simply cutting costs), (2) use independent experts to evaluate assumptions, (3) ensure that pension boards include key stakeholders and possess significant financial expertise, and (4) encourage the necessary changes at the state level—and, if that fails, take local action.

To order the complete article, “Public Pensions Face Record Pace of Change,” by Elizabeth K. Kellar, which appears in the Municipal Year Book 2012, go to the ICMA bookstore.