ECONOMIC REPORT OF THE PRESIDENT

Figure 2-iii
State and Local Government Surplus as Percent of Nominal
GDP, 1950–2016
Percent
1.5
1.0
0.5
0.0
-0.5
2016:Q3
-1.0
-1.5
-2.0
-2.5
1950 1960 1970 1980 1990 2000 2010
Note: Shading denotes recession.
Source: Bureau of Economic Analysis.
obligations—place a burden on finances for many State and local governments.
Unfunded liabilities, measured on a net-present value basis, equal
the difference between liabilities (the amount the governments owe in
benefits to current employees who have already accrued benefits they
will collect in the future) and assets held in public pension funds, and
indicate the amount of benefits accrued for which no money is set aside.
The size of these unfunded pension liabilities relative to State and local
receipts ballooned immediately after the recession driven by a combination
of factors, including underfunding and lower-than-expected investment
returns, and remain elevated at a level that was about 80 percent
of a year’s revenue in the first three quarters of 2016. Assets may fall
short of liabilities when governments do not contribute the full annual
required contribution (ARC), when they increase benefits retroactively,
or when returns on investments are lower than assumed. Additionally,
unfunded liabilities can grow if actuaries’ assumptions do not hold
true. For example, if beneficiaries live longer than anticipated, they will
receive more benefits than predicted, even if the government has been
paying the ARC consistently. Unfunded liabilities will eventually require
the government employer to increase revenue, reduce benefits or other
government spending, or do some combination of these.
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