Category Archives: Public Sector

State and Local Pension Plans Funding Sputters in FY 2016

Source: Jean-Pierre Aubry, Caroline V. Crawford, and Alicia H. Munnell, Center for State and Local Government Excellence, July 2017

From the summary:
SLGE’s annual update on the funded status of state and local pension plans outlines the challenging path that plans have been on, especially since 2009.

Key findings:
• Overall, public pensions are in a better position than they were immediately following the recent economic downturn;
• The ratio of assets to liabilities for the 170 plans in the Public Plans Database decreased from 73 percent in 2015 to 72 percent in 2016, as measured by the traditional GASB standard; and from 73 percent to 68 percent, as measured by the new standard;
• These plans, which account for the vast majority of the members and assets of state and local pension plans, have been paying more of their required contributions (92 percent) relative to recent years;
• Payments as a percentage of payroll have increased to 18.6 percent;
• Plans in the PPD have continued to adjust their annual investment return assumptions downward to an average of 7.6 percent in FY 2016;
• In order to return the aggregate funded ratio above 80 percent, plan sponsors will need to increase their contribution efforts and investment returns must consistently meet or exceed expectations over a sustained, longer term.

Investment Risk-Taking by Public Pension Plans: Potential Consequences for Pension Funds, State and Local Governments, and Stakeholders in Government

Source: Donald J. Boyd and Yimeng Yin, Rockefeller Institute of Government, Pension Simulation Project, July 7, 2017

Public pension plans in the United States have $3.8 trillion of invested assets, more than two-thirds of which are in equities and similar assets. Unlike private pension funds, public pension funds have increased their equity allocations dramatically over the last two decades, making their investment returns and unexpected investment gains and losses far more volatile than before. This means that plan funded status and contributions requested of governments also are more volatile than before, increasing the risks to taxpayers, stakeholders in government services and investments, and workers and retirees.

One important way to examine the impact of investment-return volatility upon plan funded status and contributions is with a stochastic simulation model that draws investment returns from a probability distribution. We have constructed a pension simulation does that, and we use it to examine the interplay between investment return volatility and funding policy, and to examine the potential consequences of different investment return environments….
Related:
PowerPoint presentation

Making Informed Changes to Public Sector Pension Plans

Source: National League of Cities, March 2017

From the abstract:
Pensions play a critical role in the ability of local governments to attract and retain the workforce needed to meet citizen demands. The costs associated with this employee benefit, however, can be substantial. A recent National League of Cities (NLC) survey revealed that over the past year the cost of pensions increased in more than 70 percent of cities. One in three cities identified these expenses as the factor most negatively affecting their budgets.

Agencies Could Learn a Lot From Tennessee’s Shift to Pay for Performance

Source: Howard Risher, Gov Exec, June 28, 2017

Federal agencies will certainly not be the first public employer to switch to pay for performance. Among the earliest were Florida in 1968 and Wisconsin and Utah in 1969. Over the next four decades, reports show another 20 states adopted the policy although almost half cover less than 10 percent of the workforce. Unfortunately, their experience has not been documented or assessed recently.

The most recent may be Tennessee, and by all standards it’s demonstrated one of most successful transitions. The statute Tennessee Excellence, Accountability and Management (TEAM) Act was signed in April 2012, although significantly the first payouts didn’t occur until 2016…..

State and Local Government Contributions to Statewide Pension Plans: FY 15

Source: National Association of State Retirement Administrators (NASRA), Issue Brief, June 2017

From the introduction:
Pension benefits for employees of state and local governments are paid from trusts to which public employees and their employers contribute during employees’ working years. Timely contributions are vital to the proper funding and sustainability of these plans: failing to pay required contributions results in higher future costs, due largely to the foregone investment earnings that the contributions would have generated.

Nationally, contributions made by state and local governments to pension trust funds in recent years account for just less than five percent of all spending. Pension spending levels, however, vary widely among states and are actuarially sufficient for some pension plans and insufficient for others. Unlike employees, who must always contribute the amount prescribed in statute or by plan rules, some public employers—states, cities, etc.—have discretion to set the contributions they make to public pension plans. This disparity in contribution governance arrangements is one factor leading to a wide range of experience among public employers concerning required contributions. Overall, the experience for FY 15 reflects an improved effort among state and local governments to make actuarially determined pension contributions, and a decline in the rate of growth of pension costs.

This brief describes how contributions are determined; the recent public employer contribution experience; and trends in employer contributions over time.

A First Look at Alternative Investments and Public Pensions

Source: Jean Pierre Aubry, Anqi Chen, Alicia Munnell, Center for State and Local Government Excellence, Issue Brief, June 2017

From the summary:
The brief uses data from PublicPlansData.org to explore which state and local pension plans have the largest allocations in investments outside of public equities, bonds, and cash and the broader impact of aggregate allocation shifts on returns and volatility.

The brief’s key findings include:
– Public pension plans have boosted their holdings in alternative assets, defined as private equity, hedge funds, real estate, and commodities.
– This shift reflects a search for higher returns, a hedge for other investment risks, and diversification.
– The question is how the shift has affected returns and volatility over two periods: 2005-2015 and 2010-2015.
– In terms of returns, a 10-percent increase in the average allocation to alternatives was associated with a reduction of 30-45 basis points, primarily due to hedge funds.
– In terms of volatility, alternatives did not have a statistically significant effect. Hedge funds reduced volatility, but real estate and commodities increased it.
– This analysis is only a first look at this area; further research is clearly warranted.

U.S. Public Pension Plan Contribution Indices, 2006–2014

Source: Lisa Schilling, Society of Actuaries, June 2017

In March 2016, the Society of Actuaries (SOA) introduced contribution indices, metrics that compare pension plan contributions to benchmarks that represent the contribution level needed to pay down unfunded liabilities or to satisfy a specific requirement. This study explores various contribution indices for employer contributions among 160 state and large city public sector pension plans in the United States over 2006-2014 using the assets and liabilities reported under Government Accounting Standards Board (GASB) guidelines. The analysis isolates employer contributions because state law typically defines employee contribution rates, whereas employer contributions are typically more flexible.

Key observations include:
– For 130 plans with consistently viable data for this study over 2006–2014, total unfunded liabilities as reported under GASB guidelines increased about 150% from about $400 billion in 2006 to approximately $1 trillion in 2014, while liabilities increased 47%, from about $2.5 trillion to roughly $3.7 trillion.
– In every year studied, most of the 160 plans with enough data to complete analysis for the year received insufficient employer contributions to maintain their unfunded liabilities— they experienced negative amortization. In 2014, 72% of plans experienced negative amortization, up from 65% in 2006.
– Many plans with negative amortization contributed at least as much as their target contribution. However, at the peak in 2010, 76% of target contributions entailed negative amortization. By 2014, the percentage fell to 67%, roughly the same level as 2006.
– For 2014, 3% of plans showed a funding surplus and 20% of plans received enough employer contributions to fund their shortfall within 30 years without it growing through negative amortization in the meantime.
– Employer contributions for the same 130 plans increased 76%, from about $48 billion in 2006 to roughly $85 billion in 2014. Employee contributions increased 30% during this period, from $28 billion to $37 billion, while payroll and prices both increased 17%…..

Pension burdens to rise through 2020, even in positive investment scenario

Source: Thomas Aaron, Timothy Blake, Moody’s, U.S. Public Finance, Sector In-Depth, June 20, 2017
(subscription required)

A new report gauges pension-related risks in three scenarios for investment returns through fiscal 2020, after adjusted net pension liabilities for US public pension funds surpassed $4 trillion nationwide in 2016.

Quarterly Survey of Public Pensions for 2017: First Quarter

Source: U.S. Census Bureau, June 2017

This report provides national summary data on the revenues, expenditures and composition of assets of the largest defined benefit public employee pension systems for state and local governments. This report produces three tables: Tables 1 and 3 include data on cash and security holdings and Table 2 provides data on earnings on investments, contributions and payments.