Public Pensions Pensions

At the end of 1999, state and local government employee pension funds held $3.0 trillion in assets. To put this figure in perspective, private-employee Table 1 State and Local and Private Pension Fund Investments, Fourth Quarter, 1999 SOURCE: Board of Governors of the Federal Reserve System (2000) funds held $4.9 trillion, and life insurance companies held $3.1 trillion. Both private and public pension funds were invested primarily in credit market instruments and in corporate equities (see Table 1). The balance of these assets is different, however, with public funds holding 67 percent of assets in corporate equities, compared with 50 percent in private funds. The share of state and local plan assets held in equities has increased dramatically over the past several decades, rising from only 3 percent in 1960 and 17 percent in 1970.

A given plan's investment policy will reflect its objectives, applicable statutory restrictions (if any), and the board's control over investment decisions. For example, for many years West Virginia prohibited its state pension plans from investing in equities, and many plans continue to limit investments in various types of assets. However, since the 1980s, many state legislatures have replaced the restrictive "legal lists" of allowed investments with a more flexible standard of prudence. This trend allowed many plans to take advantage of the stock market's strong performance during the 1990s, reducing the effective cost of plan maintenance for sponsoring governments and contributing to many plans' current strong funding status.