Locally administered public pension plans, which had lagged behindstate plans in funding levels, are making some progress, graduallyclosing the gap between the two.

That’s according to a brief from the Center for Retirement Research atBoston College. In its last comprehensive review of locallyadministered plans’ funded status compared with that of stateplans, conducted in 2011, state plans were better funded with localplans trailing.

But there have been lots of changes since then, with numerousreforms to both state and local plans seeking to control risingpension costs and limit liability growth.

In its current examination of local plans, CCR used the mostrecent data available—from 2015 and 2016—and found that local plansno longer trail state plans by such wide margins.

In comparing the trends in funded status for both state andlocal plans, the brief finds that although local plans have paidmore of their actuarially required contributions than state plans,they experienced returns that were “relatively poor,” which leftthem lagging behind state plans.

This occurred despite their size, since local plans aren’tnecessarily small ones. The report says that there are considerablymore local plans than state plans, but state plans have the edge inthe number of members and the amount of assets. Yet the range insize of local plans is tremendous.

The report points out that “more than 90 percent of local planshad under $1 billion in assets in 2015, but three plans–the NewYork City Employee Retirement System, the New York City TeachersRetirement System, and the Los Angeles County Employee RetirementSystem–each had market assets in excess of $40 billion.”

In the early 2000s, the report says, both types of plans wereoverfunded, in aggregate, but then the financial crisis hit andlocal funds fell more steeply than state funds. Since then,however, the funded status of local plans has “increased modestlyfrom 67.0 to 69.9 percent, while the funded status of state planshas remained essentially level between 73.3 to 73.9 percent,” itsays.

Two factors played a big role in this change: contributions andinvestment returns.

Depending on how much the employer actually forked over forrequired contributions, and how the employer calculated thatcontribution (new regulations kicked in in 2014, when newGovernment Accounting Standards Board standards replaced the AnnualRequired Contribution with the Actuarially Determined EmployerContribution), long-term trends in the percentage of requiredcontributions received could be evaluated.

The “level percentage of payroll” method allows plans toamortize unfunded liabilities, but it can mean that plans can fallbehind on required contributions by using smaller amortizationpayments early on and larger ones later, and then regularlyextending the amortization period—thus keeping the payments smallerthan they need to be for an indefinite period of time.

Plans that instead use the level-dollar amortization method, onthe other hand, pays down the unfunded liability more quickly. Butboth methods can keep plans short on contributions, contributing totheir underfunded woes.

Local plans, using the level-dollar method, got more of theirrequired contributions paid up than state plans, since, the reportsays, “about a third of local plans already use a level-dollarmethod, compared to just under a quarter of state plans.”

And then there’s the matter of investment returns. Local planstended to have higher returns than state plans, which the studysays could be due in part to their lower allocation to alternativeinvestments such as private equity, hedge funds, real estate andcommodities.

Currently there’s a 6 percent differential between state andlocal plans’ allocations to alternative investments, which hasimproved the returns experienced by local plans and helped to closethe gap in funded status between them.