Category Archives: Pensions

State and Local Governments’ Fiscal Outlook: 2018 Update

Source: U.S. Government Accountability Office, GAO-19-208SP, December 13, 2018

From the summary:
What’s the prognosis for the fiscal health of state and local governments across the nation?

Our annual outlook suggests the sector will have an increasingly tough time covering their bills over the next 50 years. Our model shows both revenue and spending will increase; however, spending will rise faster. Revenues may be insufficient to sustain the amount of government service currently provided.

Our model also suggests health care costs will largely drive the spending increases—in particular, Medicaid spending and spending on health benefits for state and local government employees and retirees.
Related:
Highlights
Podcast

Stability in Overall Pension Plan Funding Masks a Growing Divide

Source: Jean-Pierre Aubry, Caroline V. Crawford and Kevin Wandrei, Center for Retirement Research at Boston College, SLP#62, October 2018

The brief’s key findings are:
– Under traditional accounting rules, the aggregate funded ratio for state and local pension plans in 2017 was 72 percent, largely unchanged from recent years.
– This overall stability, however, masks a growing gap among plans: the average funded ratio was 90 percent for the top third but just 55 percent for the bottom third.
– The plans in the bottom third are in worse shape because, on average, they receive lower long-term investment returns and pay less of their required contributions.
– In addition, all plans face the possibility of a market downturn, which could set back funding for several years.

How Much Income Do Retirees Actually Have?

Source: Anqi Chen, Alicia H. Munnell and Geoffrey T. Sanzenbacher, Center for Retirement Research at Boston College, IB#18-20, November 2018

The brief’s key findings are:
– Recent research has re-documented that the Census Bureau’s Current Population Survey (CPS) understates retirement income.
– Some have wondered if this problem also applies to other surveys and calls into question decades of research that suggest many are ill-prepared for retirement.
– To answer this question, the analysis compared estimates from five commonly used national surveys to administrative data from the IRS and Social Security.
– This comparison shows that:
– the CPS continues to substantially understate retirement income, but
– the other four surveys – the SCF, HRS, SIPP, and PSID – track closely with administrative data, and
– estimates of retirement preparedness using a reliable survey find that roughly half of older households may fall short in retirement.

Related:
Working Paper

Prefunding Public Sector Retiree Health Benefits: The California Example

Source: John G. Kilgour, Compensation & Benefits Review, OnlineFirst, First Published November 1, 2018

From the abstract:
Most state and local governments have historically funded their retiree health care benefits on a pay-as-you-go basis. This has resulted in massive amounts of unfunded liability in many states including the five largest states of California, Florida, Illinois, New York and Texas. Recent accounting and reporting rules changes by the Governmental Accounting Standards Board has made these liabilities more visible and has resulted in more attention being paid to this problem. California has adopted a plan to pay off its huge unfunded retiree health benefit liability by 2044. It might serve as an example for other states with similar problems.

Thanks To A Strong Economy, California’s School Districts Can Face Continued Pension Increases–Though Will This Last?

Source: S&P Global Ratings, November 8, 2018
(subscription required)

Key Takeaways

– School revenue increases, driven by a strong state economy, have far outpaced nominal growth in required pension contributions.
– Although the share of district expenditures for pension contributions has increased, and will likely continue to grow, increases to median carrying charges have been sustainable.
– Most districts are more than two-thirds through the scheduled rise in pension contributions, and we expect growth in contribution rates will slow and stabilize over the next several years.
– Districts have not made significant pension-driven cuts to their operations to date, but may reduce salary increases and headcount through attrition moving forward.
– If the state experiences a recession, volatility in state funding could be a more likely source of adverse credit pressure for some districts.

State Public Pension Funds’ Investment Practices and Performance: 2016 Data Update

Source: Pew Charitable Trusts, Issue Brief, September 26, 2018

Substantial investment in complex and risky assets exposes funds to market volatility and high fees.

From the overview:
State and local public retirement systems held $3.8 trillion in assets in 2016, the most recent year for which comprehensive data are available. With the retirement security of 19 million current and former state and local employees at stake, sound and transparent investment strategies are essential.

In a bid to boost investment returns and diversify portfolios, plans in recent decades have shifted away from low-risk, fixed-income vehicles in favor of stocks and alternatives such as private equity, hedge funds, real estate, and commodities. In 2016, half of plan assets were invested in equities, a quarter in alternative investments, and another quarter in bonds and cash.

Investment performance over the last five to six years has, for the most part, tracked plan target rates, with average returns of about 7 percent. However, during the same time frame the fiscal position of public funds has not improved, and in most cases has declined. And while equities and alternatives can provide higher financial returns, they also leave funds vulnerable to market volatility and the risk of shortfalls. Furthermore, as our population ages and the number of retirees grows, cash outflows increase, adding more pressure to pension fund balance sheets.

Because earnings on these investments are expected to pay for about 50 to 60 percent of promised retirement benefits for public workers and retirees, careful attention to reporting and transparency has become increasingly important. In particular, understanding the impact of market volatility on public plans and their sponsoring governments’ budgets is critical for policymakers and stakeholders. Mandatory stress test reporting and full disclosure of asset allocation, performance, and fee details are therefore essential to determining whether public pension plans have the ability to pay promised retirement benefits…..

Focus On… Lump Sum Distributions from Defined Benefit Plans

Source: David A. Pratt, Journal of Pension Benefits, Vol. 26, No. 1, Autumn 2018
(subscription required)

As one strategy to reduce risk, some defined benefit plans are allowing lump sum distributions. This practice gives rise to numerous questions, among them whether the lump sum received by the participant is equal to the accrued value he or she is giving up.

Rethinking Multiemployer Pensions: A Cash Balance Solution

Source: Samuel S. Stanley, Journal of Pension Benefits, Vol. 26, No. 1, Autumn 2018
(subscription required)

Multiemployer pension plans are a very important part of compensation for millions of union workers. Unfortunately, many of these plans are failing to achieve their most basic objectives. But now a creative and unique new approach exists —a “Cash Balance Solution” —which offers a new way to address and to solve these plans’ financial, human resources, and business-related issues.

Graying of U.S. Bankruptcy: Fallout from Life in a Risk Society

Source: Deborah Thorne – University of Idaho, Pamela Foohey – Indiana University Maurer School of Law, Robert M. Lawless – University of Illinois College of Law, Katherine M. Porter – University of California – Irvine School of Law, August 5, 2018

From the abstract:
The social safety net for older Americans has been shrinking for the past couple decades. The risks associated with aging, reduced income, and increased healthcare costs, have been off-loaded onto older individuals. At the same time, older Americans are increasingly likely to file consumer bankruptcy, and their representation among those in bankruptcy has never been higher. Using data from the Consumer Bankruptcy Project, we find more than a two-fold increase in the rate at which older Americans (age 65 and over) file for bankruptcy and an almost five-fold increase in the percentage of older persons in the U.S. bankruptcy system. The magnitude of growth in older Americans in bankruptcy is so large that the broader trend of an aging U.S. population can explain only a small portion of the effect. In our data, older Americans report they are struggling with increased financial risks, namely inadequate income and unmanageable costs of healthcare, as they try to deal with reductions to their social safety net. As a result of these increased financial burdens, the median senior bankruptcy filer enters bankruptcy with negative wealth of $17,390 as compared to more than $250,000 for their non-bankrupt peers. For an increasing number of older Americans, their golden years are fraught with economic risks, the result of which is often bankruptcy.

Analyzing the Interplay Between Public-Pension Finances and Governmental Finances: Lessons from Linking an Economic Model to a Pension Fund Model

Source: Yimeng Yin -The Nelson A. Rockefeller Institute of Government, Don Boyd – Center for Policy Research, The Rockefeller College, University at Albany, July 11, 2018, Paper prepared for: Brookings Municipal Finance Conference July 17, 2018

…. Research suggests that the real world differs from these assumptions, in some ways that mean the assumptions may understate risks, and in other ways that mean the assumptions may overstate risks. Investment returns may not be normally distributed and may not be independent over time. Perhaps more important, investment returns and tax revenue may be correlated: a poor economy may cause investment returns to fall short of expectations, and may also cause tax revenue to fall short. The resulting increase in required employer contributions may cause additional fiscal pressure if increases come when tax revenue is low.

We address these issues, focusing on the correlation between tax revenue and the economy, by building a small macroeconomic model that can generate internally consistent stochastic scenarios of growth in real gross domestic product (GDP) and returns from stock and bond investments. ….

Related:
View Yin & Boyd’s slides
View Quinby’s slides
Laura Quinby – Center for Retirement Research, Boston College