Category Archives: Pensions

Police and Fire Pensions in Florida: A Comparison of Conditions After 10 Years

Source: Joseph Vonasek, Robert Lee, Compensation & Benefits Review, OnlineFirst, April 5, 2021
(subscription required)

From the abstract:
This article is an analysis of 31 defined benefit police and fire pension plans of 20 municipalities in Florida. The authors conducted a similar assessment of these same plans ten years earlier to determine the fiscal impact of these plans due to state mandates that accompany state funding for each of these plans. The current study analyzes key measures of fiscal health over the last ten years for these same plans to ascertain whether the fiscal condition of these plans remained constant, that is, whether underfunded plans continued to be questionably managed and whether well-funded plans continued to be fiscally stable considering economic trends and the lessening of state mandates on the use of state funding for these plans. The findings show that the overwhelming majority of the plans neither significantly changed their financial condition nor their general ranking among the plans evaluated.

Public Pension Governance and Opportunistic Accounting Choice: A Politico-Economic Approach

Source: Odd J. Stalebrink, Pierre Donatella, The American Review of Public Administration, Volume: 51 issue: 3, April 2021
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From the abstract:
The selection of actuarial assumptions used to value state and local government pension liabilities is an important culprit of the looming state and local pension crisis in the U.S. Due to the impact these selection choices have on the value of pension liabilities and annual required contributions (ARC), pension plans are often said to make these choices opportunistically for purposes of freeing up budget resources and making pension funding look better. Using empirical data on 114 state-administered pension plans, this research shows that the likelihood of such opportunistic pension accounting choices (OPAC) increases when the plan is underfunded, organized as a cost-sharing plan, governed by a politically embedded fiduciary body, and when the sponsoring government is surrounded by a high degree of unionization, and is divided in terms of partisan control. The results also show that the likelihood of OPAC decreases when a pension plan is subjected to an audit by a Certified Public Accountant (CPA), suggesting that professional gatekeepers can play an important role in limiting the adverse effects of OPAC behavior, including insufficient ARC payments and reduced transparency of governmental financial reports.

Public Corruption and Pension Underfunding in the American States

Source: Cheol Liu, John Mikesell, Tima T. Moldogaziev, American Review of Public Administration, OnlineFirst, Published February 16, 2021
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From the abstract:
Unfunded public pension obligations represent a great challenge for policy makers in the American states. We posit that a part of pension underfunding relates to the level of public corruption. Empirical findings in the article show that funding ratios in public pension funds are inversely related to the incidence levels of corruption in the state, with other fiscal, political, and institutional covariates held constant. We show that this can happen through higher pension benefits, lower actuarially required contributions (ARCs), lower percentage of actual ARC contributions, and poorer investment outcomes. Based on empirical estimates, we find that a reduction of corruption by one standard deviation around the mean would permit the states to save on pension benefits by 10.24% annually (or US$1,894.64 per recipient), increase required ARC by 4.40%, increase actual ARC contributions by 8.46%, and improve investment returns by 4.72%. Therefore, policies to reduce public-sector corruption, or to improve the insulation of pension funds in relatively more corrupt environments, can make a significant contribution toward tackling the public pension underfunding crisis in the American states.

State and Local Government Pension Funding on the Eve of the COVID-19 Recession

Source: John G. Kilgour, Compensation & Benefits Review, OnlineFirst, August 5, 2020
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From the abstract:
This article examines the funding of public pension plans through 2019. Particular attention is paid to the impact of the Governmental Accounting Standards Board’s Standard No. 68. It addressed (1) discount rates, (2) amortization periods, (3) asset valuation and smoothing, and (4) the actuarial cost method used. The combined effect of these measures has been to increase the amount of public pension underfunding significantly. The actuarial funded ratio of the 126 plans in the Public Plans Database went from 101.9 in 2001 to 71.9 in 2019, on the eve of the COVID-19 recession. It will no doubt continue to worsen in the years ahead. The extent of that likely worsening is also explored.

Do Pensions Matter for Recruiting State and Local Workers?

Source: Laura D. Quinby, Geoffrey T. Sanzenbacher, State and Local Government Review, OnlineFirst, Published August 7, 2020
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From the abstract:
Many state and local governments have responded to financial challenges facing their pension systems by cutting benefits or by shifting costs to employees. Will these changes make it harder for state and local governments to recruit highly skilled workers? This study explores this question by linking individual-level data from the Current Population Survey on worker transitions between the private and public sectors to measures of state and local pension generosity from the Public Plans Database. The results suggest that state and local employers with relatively generous pensions are better able to recruit high-wage workers from the private sector, but that this advantage is lost as workers are asked to contribute more from current paychecks to prefund those benefits. The findings help inform an ongoing debate over the role that state and local pensions play in shaping the public workforce.

Pension Obligation Bonds: Yes or No?

Source: Government Finance Review, Vol. 30 no. 3, June 2020
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Pension obligation bonds (POBs) are taxable bonds that some state and local governments have issued as part of an overall strategy to fund the unfunded portion of their pension liabilities by creating debt. When economic times are bad, governments sometimes consider issuing POBs to reduce their fiscal stress, but the practice is controversial. The use of POBs rests on the assumption that the bond proceeds, when invested with pension assets in higheryielding asset classes, will be able to achieve a rate of return that is greater than the interest rate owed over the term of the bonds. However, POBs involve considerable investment risk, making this goal very speculative.

For these reasons, GFOA President and Hanover County Public Schools Assistant Superintendent for Business and Operations Terry Stone sticks with GFOA’s position that state and local governments should not issue POBs. On the other hand, Girard Miller, former chief investment officer of the Orange County Employees Retirement System with a career in public finance spanning 30+ years, suggests that, at certain times and under certain economic circumstances, a pension fund can reasonably consider POBs as part of its overall strategy.

Pension investment losses are poised to inflict material damage on US municipal credit

Source: Moody’s, March 24, 2020
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Recent US public pension investment losses are likely to severely compound the pension liability challenge facing many state and local governments. At the same time, the economic fallout from the coronavirus is reducing revenue levels and threatening the ability of governments to afford higher pension costs.

Fortifying Main Street: The Economic Benefit of Public Pension Dollars in Small Towns and Rural America

Source: Dan Doonan, Maryna Kollar, Nathan Chobo, Tyler Bond, National Institute on Retirement Security, March 2020

From the summary:
As many small towns and rural communities across America face shrinking populations and slowing economic growth, a new report finds that one positive economic contributor to these areas is the flow of benefit dollars from public pension plans. In 2018, public pension benefit dollars represented between one and three percent of gross domestic product (GDP) on average among the 1,401 counties in 19 states studied.

These findings are detailed in a new study, Fortifying Main Street: The Economic Benefit of Public Pension Dollars in Small Towns and Rural America.

This new report finds that public pension benefit dollars also account for significant amounts of total personal income in counties across the nineteen states studied. For all 1,401 counties in this study, pension benefit dollars represent an average of 1.37 percent of total personal income, while some counties experience more than six percent of total personal income derived from pension dollars.

The report’s key findings are as follows:

  • Public pension benefit dollars represent between one and three percent of GDP on average in the 1,401 counties studied.
  • Rural counties and counties with state capitals have the highest percentages of populations receiving public pension benefits.
  • Small town counties experience a greater relative impact both in terms of GDP and total personal income from public pension benefit dollars than rural or metropolitan counties.
  • Rural counties experience more of an impact in terms of personal income than metropolitan counties, whereas metropolitan counties experience more of an impact in terms of GDP than rural counties.
  • Counties with state capitals are outliers from other metropolitan counties, likely because there is a greater density of public employees in these counties, most of whom remain in these counties in retirement.
  • On average, rural counties have lost population while small town counties and metropolitan counties have gained population in the period between 2000 and 2018, but the connection between population change and the relative impact of public pension benefit dollars is weak.

Examining the Nest Egg: The Sources of Retirement Income for Older Americans

Source: Frank Porell, Tyler Bond, National Institute on Retirement Security (NRIS), January 2020

From the summary:
A new report finds that a large portion (40 percent) of older Americans rely only on Social Security income in retirement while only a small percentage of older Americans (seven percent) receive income from Social Security, a defined benefit pension, and a defined contribution account. Retirement income from these three sources is widely considered to be the ideal situation to ensure retirement security, particularly for the middle class. Retirees with these three sources of income are far less likely to face poverty and economic hardship.

These findings are contained in a new report from the National Institute on Retirement Security (NIRS), Examining the Nest Egg: The Sources of Retirement Income for Older Americans. The report is co-authored by Tyler Bond, NIRS manager of research, and Dr. Frank Porell, University of Massachusetts Boston professor emeritus.

The analysis also finds that without income from Social Security in 2013, the number of poor older U.S. households would have increased by more than 200 percent to 11 million households. Absent income from defined benefit pensions, the number of poor older households would have increased by 19 percent to more than four million households in 2013. Defined contribution plans, however, are less powerful at keeping older households out of poverty than pensions and Social Security because fewer near-poor households have assets in 401(k)-style defined contribution accounts and income from those accounts provided a smaller portion of total income. Without income from defined contribution accounts, the estimated number of poor older households would have increased by five percent.

An Introduction to Police and Fire Pensions

Source: Jean-Pierre Aubry and Kevin Wandrei, Center for Retirement Research at Boston College, SLP#69, February 2020

The brief’s key findings are:

  • Pension and retiree health benefits for public safety workers are more expensive than those of other local government workers, largely due to earlier retirement ages.
  • Perhaps surprisingly, though, their retirement benefits make up only a very small share of total local government spending.
  • Some evidence suggests that public safety workers could work longer, which may have implications for plans’ retirement age.
  • However, raising retirement ages would have little impact on government finances, particularly since it might involve higher wages to maintain a quality workforce.