Category Archives: Pensions

State and Local Government Spending on Public Employee Retirement Systems

Source: National Association of State Retirement Administrators, NASRA Issue Brief, Updated April 2017

State and local government pension benefits are paid not from general operating revenues, but from trust funds to which public retirees and their employers contributed while they were working. On a nationwide basis, pension contributions made by state and local governments account for roughly 4.5 percent of direct general spending. Current pension spending levels, however, vary widely and are sufficient for some entities and insufficient for others.

In the wake of the 2008-09 market decline, nearly every state and many cities have taken steps to improve the financial condition of their retirement plans and to reduce costs. States and cities changed their pension plans by adjusting employee and employer contribution levels, restructuring benefits, or both. Generally, adjustments to pension plans have been found to be proportionate to the plan’s funding condition and the degree of change needed.

The Drivers of Public Sector Pension Reform Across the U.S. States

Source: Michael Thom, The American Review of Public Administration, Volume 47, Issue 4, May 2017
(subscription required)

From the abstract:
This study analyzes the diffusion of public sector pension reforms across the American states between 1999 and 2012, a policy area notable for its fiscal implications as much as its recent political polarization. Previous enactment in other, non-contiguous states was the largest and most consistent driver of reform. Otherwise, empirical findings suggest that reform antecedents varied by reform type. Existing funding levels reduced the likelihood that states would cut benefits, change pension governance, or reduce cost of living allowances, but had no effect otherwise. Evidence for partisan legislative influence is weak, although Republican control had partial, positive effects on the enactment of pension governance reforms and increases to the retirement age. Across the board, other relevant factors such as constitutional pension protections, collective bargaining rights, and union membership density had no effect. That external contagion pressures have a more robust influence than endogenous conditions raises questions about the future efficacy of pension reform.

State and Local Fiscal Facts: 2017

Source: National Governors Association (NGA), National Conference of State Legislatures (NCSL), The Council of State Governments (CSG), National Association of Counties (NACo), National League of Cities (NLC), U.S. Conference of Mayors (USCM), International City/County Management Association (ICMA), National Association of State Budget Officers (NASBO), National Association of State Auditors Comptrollers and Treasurers (NASACT), Government Finance Officers Association (GFOA), National Association of State Retirement Administrators (NASRA), 2017

In the past few years, the fiscal conditions of state and local governments have stabilized, but improvements have been uneven. A new fact sheet “State and Local Fiscal Facts: 2017” examines the status of state and local finances, municipal bonds, and state and local pensions.

Summary of the Quarterly Survey of Public Pensions for 2016:Q4

Source: U.S. Census Bureau, G16-QSPP4, March 2017

For the 100 largest public-employee pension systems in the country, assets (cash and investments) totaled $3,396.7 billion in the fourth quarter of 2016, increasing by 0.4 percent from the 2016 third-quarter level of $3,383.8 billion. Compared to the same quarter in 2015, assets for these major public-pension systems increased 4.2 percent from $3,260.5 billion, continuing the year-to-year growth trend started in the third quarter of 2016 (see Figure 1). The asset categories highlighted in this summary are the major asset categories (equities, debt instruments, and cash equivalents) and do not reflect all of the categories published for the Quarterly Survey of Public Pensions (QSPP).

Public Pension Plan Investment Return Assumptions

Source: National Association of State Retirement Administrators, NASRA Issue Brief, February 2017

From the introduction:
As of September 30, 2016, state and local government retirement systems held assets of $3.82 trillion. These assets are held in trust and invested to pre-fund the cost of pension benefits. The investment return on these assets matters, as investment earnings account for a majority of public pension financing. A shortfall in long-term expected investment earnings must be made up by higher contributions or reduced benefits.

Funding a pension benefit requires the use of projections, known as actuarial assumptions, about future events. Actuarial assumptions fall into one of two broad categories: demographic and economic. Demographic assumptions are those pertaining to a pension plan’s membership, such as changes in the number of working and retired plan participants; when participants will retire, and how long they’ll live after they retire. Economic assumptions pertain to such factors as the rate of wage growth and the future expected investment return on the fund’s assets.

As with other actuarial assumptions, projecting public pension fund investment returns requires a focus on the long-term. This brief discusses how investment return assumptions are established and evaluated, compares these assumptions with public funds’ actual investment experience, and the challenging investment environment public retirement systems currently face.

Public Pension Plan Investment Return Assumptions

Source: National Association of State Retirement Administrators, NASRA Issue Brief, February 2017

As of September 30, 2016, state and local government retirement systems held assets of $3.82 trillion. These assets are held in trust and invested to pre-fund the cost of pension benefits. The investment return on these assets matters, as investment earnings account for a majority of public pension financing. A shortfall in long-term expected investment earnings must be made up by higher contributions or reduced benefits.

Funding a pension benefit requires the use of projections, known as actuarial assumptions, about future events. Actuarial assumptions fall into one of two broad categories: demographic and economic. Demographic assumptions are those pertaining to a pension plan’s membership, such as changes in the number of working and retired plan participants; when participants will retire, and how long they’ll live after they retire. Economic assumptions pertain to such factors as the rate of wage growth and the future expected investment return on the fund’s assets.

As with other actuarial assumptions, projecting public pension fund investment returns requires a focus on the long-term. This brief discusses how investment return assumptions are established and evaluated, compares these assumptions with public funds’ actual investment experience, and the challenging investment environment public retirement systems currently face.

Softening Investment Expectations Signal Accelerating Budget Pressure from Pensions

Source: Thomas Aaron, Timothy Blake, Moody’s, Sector InDepth, State and Local Government – US, February 16, 2017
(subscription required)

State and local governments have held down annual pension contributions with high assumed discount rates, which in turn reflect high assumed returns on their pension assets. Generally, the higher the assumed discount rate, the lower the annual contribution requirement. Facing investment conditions that increasingly suggest lower future returns, however, the California Public Employees’ Retirement System (CalPERS, Aa2 stable) and many of its national peers are gradually lowering their assumed discount rates. Such moves will generally result in governments making higher pension contributions, incrementally improving their discipline in funding their pension promises earlier in time. But these higher contributions also mean that budgetary pressure from pensions, already on the rise in many cases, is accelerating. Meanwhile, pension investment volatility risk remains high.

Cost Sharing Among State Defined Benefit Pension Plans: Approaches to managing risk and cost uncertainty

Source: Greg Mennis, Pew Charitable Trusts, January 2017

From the overview:
A number of states with defined benefit, or traditional, pension plans have enacted policies that retain the core elements of the plans while sharing the risk of cost increases—as well as potential gains—between public employees and employers. These mechanisms for sharing costs can help reduce volatility and investment uncertainty while preserving the ability to pay promised pension benefits.

For most public sector defined benefit (DB) plans, the cost of providing these benefits fluctuates, depending on investment performance, inflation, salary growth, life spans, and workforce demographics. Cost volatility can strain state or local budgets or lead to underfunded pension plans if policymakers have not provided sufficient contributions.

In response to the budget strains and funding challenges, some states have looked to alternatives to traditional pensions, including defined contribution, cash balance, and hybrid plans. Still, most state and local governments continue to offer DB plans, though many now use cost-sharing mechanisms to reduce budget uncertainty. Employees continue to receive guaranteed lifetime benefits and in some cases see gains, such as higher cost of living adjustments (COLAs), from strong investment returns….

….This map and table highlight strategies used by large state pension plans to share cost increases with members. Looking at the benefits offered to new workers in 102 primary state retirement plans, Pew’s public sector retirement systems project identified 28 plans in 16 states that use formal cost-sharing mechanisms to manage risk….