The Center for Retirement Research at Boston College has launched a new, three-part investigation into the local side of the national pension crisis. The first brief compares the funding ratio of locally administered plans to state administered plans.

The brief, which is divided into three sections, uses a sample of 128 locally administered pension plans in 43 states to assess the funding ratio and overall health of local pensions. Researchers compared two factors to help determine the financial health of the plans: the rate at which the ARC is paid and the overall funding ratio.

In seeking their answer, researchers uncovered what they describe as a “puzzle:” Local pension plans receive a higher percentage of their annual required contribution more regularly than state pensions, but are currently less funded than state-level plans.

The CRR found that in 2011, state plans are currently 76 percent funded, compared to a 72 percent funded ratio of local pension. Both are reductions from 2007, when state and local pension were funded at 87 and 81 percent respectively.

During that same period, plans suffered a drop in the rate that the ARC is paid. State plans dropped from 86 percent to 79 percent, while local plans dropped from 91 percent to 88 percent.

Solving the puzzle required further dissecting local pensions in four areas: governance structure, discipline of the sponsor, other plans, and characteristics of the plan. What researchers found is this:

“First, paying the ARC reflects a commitment to fiscal discipline. Plan sponsors that borrow freely and have high levels of debt relative to revenue are less likely to pay the ARC. And the choice of the PUC actuarial method – in the context of state and local plans – also appears to be a signal that politicians are less committed to funding their plans. Other factors, such as governance and plan characteristics, have an effect, but being fis­cally responsible is the key.”

Researchers continued to write, “after controlling for these factors that influence the percent of ARC paid, state-administered plans are inherently less likely to pay the ARC.”

What is significant to note is that despite reduction in ARC rates, the funding gap between the local pension and the state pensions is slimming. In 2007, the plans were an average of 6 percent apart. In 2011, that had shrunk to 4 percent.

One possible cause is that larger pensions are willing to put a greater percentage of their assets in risky investments. While that helps boost funding ratios in boom years, the bust years can negatively impact funding ratios with greater volatility. The steady investments and ARC contributions provide more predictable funding even in bust years.

Even though the study focused on the largest local pension plans in each state, researchers discovered a range of plan assets that varied from as much as $30 billion to less than $10 million.  To compare funding ratios, the CRR compiled funding data from their sample – 19 of whom were already included in the CRR Public Plans Database, the other 109 will assumedly added to that resource soon.

Following this brief will be two more: an investigation the burden on local budgets imposed by pension contributions and finally a brief on bankruptcies and the possible role of pensions and their contributions.

Read the full Brief at the Center for Retirement Research at Boston College.