Guide me here, Im not a finance expert. What does that mean?
So the main purpose of their pension plan is to pay benefits, their benefits are their liabilities. What pension accounting does is it takes what your expected returns are and discounts your future liabilities by a certain rate. The notion is that you will be able to earn that return to pay for the future liabilities. Your funded status is the ratio of your assets to your discounted liabilities.
What is crazy is that corporate pension plans must discount on the Citi AA corporate curve, which reflects current market rates (except that they smoothed that a little bit last year with the MAP-21 legislation). The idea is that you earn what the market gives you, which generally is correct. Public pension plans do not have the same discounting number, they basically just pick a magic number that they expect to return (usually about 8%) and discount liabilities that way. The higher your rate is, the lower your liabilities are. Public pensions are already massively underfunded, even given very high return assumptions. If they had to discount based on market rates, funded statuses would get A LOT higher. And I mean A LOT.
This is another example of why its hilarious that politicians criticize corporations. Corporate pensions are governed by ERISA and PBGC and require certain contributions when funded status gets low enough. Public plans are supposed to but politicians have time to time just not made the contribution (looking at you Chicago).
BTW, New York state is absolutely underfunded.