Category Archives: Pensions

Teacher Pensions vs. 401(k)s in Six States: Colorado, Connecticut, Georgia, Kentucky, Missouri and Texas

Source: Leon (Rocky) Joyner, Nari Rhee, UC Berkeley Center for Labor Research and Education (Labor Center) and the National Institute on Retirement Security, January 2019

From the abstract:
A new report finds that teacher pension plans play a critical role in retaining educators while also providing greater retirement security than 401(k)-style retirement accounts. Eight out of ten educators serving in the six states studied can expect to collect pension benefits that are greater in value than what they could receive under an idealized 401(k)-type plan. The study also finds that the typical teacher in these states that offer pensions will serve 25 years in the same state, while two out of three educators will teach for at least 20 years.

These findings are featured in new research, Teacher Pensions vs. 401(k)s in Six States: Colorado, Connecticut, Georgia, Kentucky, Missouri and Texas, from the UC Berkeley Center for Labor Research and Education (Labor Center) and the National Institute on Retirement Security. The report is author by Dr. Nari Rhee, director of the Retirement Security Program at the UC Berkeley Labor Center, and Leon (Rocky) Joyner, vice president and actuary with Segal Consulting.

In Case You Missed It: S&P Global Ratings’ U.S. Public Finance 2018 Pension And OPEB Research Recap

Source: S&P Global Ratings, December 13, 2018
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S&P Global Ratings’ U.S. public finance team continues to highlight key pension and other postemployment benefit (OPEB) trends. In 2018, our research has provided comprehensive national and regional insight on these obligations and rising governmental costs to inform a forward-looking view on credit risk. In case you missed them, we have compiled a list of research reports published in 2018 on these topics.

Local government – Illinois: Ability to absorb pension costs supports exceptional credit quality for some cities

Source: David Levett, Rachel Cortez, Alexandra S. Parker, Moody’s, U.S. Public Finance, Sector In-Depth, December 14, 2018
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Heavy pension burdens have weakened credit quality for many Illinois cities in recent years, but some Illinois municipalities have maintained exceptional credit profiles. Such cities typically have drawn on their strong legal revenue-raising flexibility and high median family incomes (MFI) to support increased pension contributions while maintaining strong reserves. However, credit quality could deteriorate for even these cities if they do not continue to absorb growing pension contributions and keep already high unfunded liabilities in check…..

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
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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
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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.