State and Local Government Pension Plans: Current Structure and
Funded Status (10-JUL-08, GAO-08-983T).
Millions of state and local government employees are promised
pension benefits when they retire. Although these benefits are
not subject, for the most part, to federal laws governing private
sector benefits, there is a federal interest in ensuring that all
American have a secure retirement, as reflected in the special
tax treatment provided for private and public pension funds.
Recently, new accounting standards have called for the reporting
of liabilities for future retiree health benefits. It is unclear
what actions state and local governments may take once the extent
of these liabilities become clear but such anticipated fiscal and
economic challenges have raised questions about the unfunded
liabilities for state and local retiree benefits, including
pension benefits. GAO was asked to report on (1) the current
structure of state and local government pension plans and how
pension benefits are protected and managed, and (2) the current
funded status of state and local government pension plans. GAO
spoke to a wide range of public experts and officials from
various federal and nongovernmental entities, made several site
visits and gathered detailed information about state benefits,
and analyzed self-reported data on the funded status of state and
local pension plans from the Public Fund Survey and Public
Pension Coordinating Council.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-08-983T
ACCNO: A82783
TITLE: State and Local Government Pension Plans: Current
Structure and Funded Status
DATE: 07/10/2008
SUBJECT: Accountability
Accounting standards
Contingent liabilities
Cost analysis
Employee medical benefits
Employee retirement plans
Federal employee retirement programs
Federal/state relations
Funds management
Government retirement benefits
Health care cost control
Health care costs
Health care planning
Health care programs
Health care reform
Local governments
Pension plan cost control
Pensions
Program management
Reporting requirements
Retirees
Retirement
Retirement benefits
Retirement income
State employees
State governments
State taxes
Statistical data
Strategic planning
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GAO-08-983T
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Testimony:
Before the Joint Economic Committee:
United States Government Accountability Office:
GAO:
For Release on Delivery:
Expected at 10:00 a.m. EST:
Thursday, July 10, 2008:
State And Local Government Pension Plans:
Current Structure and Funded Status:
Statement of Barbara D. Bovbjerg, Director:
Education, Workforce, and Income Security:
GAO-08-983T:
GAO Highlights:
Highlights of GAO-08-983T, a testimony before the Joint Economic
Committee.
Why GAO Did This Study:
Millions of state and local government employees are promised pension
benefits when they retire. Although these benefits are not subject, for
the most part, to federal laws governing private sector benefits, there
is a federal interest in ensuring that all American have a secure
retirement, as reflected in the special tax treatment provided for
private and public pension funds. Recently, new accounting standards
have called for the reporting of liabilities for future retiree health
benefits. It is unclear what actions state and local governments may
take once the extent of these liabilities become clear but such
anticipated fiscal and economic challenges have raised questions about
the unfunded liabilities for state and local retiree benefits,
including pension benefits. GAO was asked to report on (1) the current
structure of state and local government pension plans and how pension
benefits are protected and managed, and (2) the current funded status
of state and local government pension plans. GAO spoke to a wide range
of public experts and officials from various federal and
nongovernmental entities, made several site visits and gathered
detailed information about state benefits, and analyzed self-reported
data on the funded status of state and local pension plans from the
Public Fund Survey and Public Pension Coordinating Council.
What GAO Found:
State and local entities typically provide pension plans with defined
benefits and a supplemental defined contribution plan for voluntary
savings. Most states still have traditional defined benefit plans as
the primary retirement plans for their workers. However, a couple of
states have adopted defined contribution and other plans as their
primary plan. State and local entities typically offer tax-deferred
supplemental voluntary plans to encourage workers to save. State
statutes and local ordinances protect and manage pension benefit and
often include explicit protections, such as provisions stating that
pensions promised to public employees cannot be eliminated or
diminished. In addition, state constitutions and/or statutes often
require pension plans to be managed as trust funds and overseen by
boards of trustees.
Most state and local government pension plans have enough invested
resources set aside to fund the benefits they are scheduled to pay over
the next several decades. Many experts consider a funded ratio
(actuarial value of assets divided by actuarial accrued liabilities) of
about 80 percent or better to be sound for government pensions. We
found that 58 percent of 65 large pension plans were funded to that
level in 2006, a decrease since 2000 when about 90 percent of plans
were so funded. Low funded ratios would eventually require the
government employer to improve funding, for example, by reducing
benefits or by increasing contributions. However, pension benefits are
generally not at risk in the near term because current assets and new
contributions may be sufficient to pay benefits for several years.
Still, many governments have often contributed less than the amount
needed to improve or maintain funded ratios. Low contributions raise
concerns about the future funded status.
Figure: Percentage of State and Local Government Pension Plans with
Funded Ratios above or below 80 Percent:
[See PDF for image]
This figure is a stacked vertical bar graph depicting the following
data:
Fiscal year:
Funded ratio 80 percent or more:
Funded ratio less than 80 percent:
Source: GAO analysis of PFS, PENDAT data.
[End of figure]
What GAO Recommends:
GAO is not making recommendations at this time.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-983T]. For more
information, contact Barbara Bovbjerg at (202) 512-7215 or
[email protected].
[End of section]
Mr. Chairman and Members of the Committee:
I am pleased to be here today as you consider the current structure and
funded status of state and local government pension plans. Nearly 20
million employees and 7 million retirees and dependents of state and
local governments--including school teachers, police, firefighters, and
other public servants--are promised pensions. Although state and local
pension plans are not subject, for the most part, to federal laws
governing private sector pension plans, there is a federal interest in
ensuring that all Americans have a secure retirement, an interest that
is reflected in preferential tax treatment for contributions and
investment earnings associated with qualified pension plans in both the
public and private sectors.
Many pension benefits represent actuarial accrued liabilities[Footnote
1] for state and local governments and ultimately the taxpayer.
Typically, pension benefits are paid from a fund made up of assets from
employers' and employees' annual contributions and the investment
earnings from these contributions. Such a fund has an unfunded
liability when the actuarial value of assets is less than actuarial
accrued liabilities. Accounting standards have called for state and
local governments to report their unfunded pension liabilities since
1986. Recently, new government accounting standards were issued,
calling for the reporting of liabilities for future retiree health
liabilities. The extent of these liabilities nationwide is not yet
known, but some predict they will be very large, exceeding $1 trillion
dollars nationwide in present value terms. It is unclear what actions
state and local governments may take once the future costs of these
liabilities become clear but such anticipated fiscal and economic
challenges have raised questions about the unfunded liabilities for
state and local retiree benefits, including pension plans.
My comments today are based on findings from our September 2007 report
entitled State and Local Government Retiree Benefits: Current Status of
Benefit Structures, Protections, and Fiscal Outlook for Funding Future
Costs[Footnote 2] and our January 2008 report entitled State and Local
Government Retiree Benefits: Current Funded Status of Pension and
Health Benefits.[Footnote 3] My remarks focus on (1) the current
structure of state and local government pension plans and how pension
benefits are protected and managed, and (2) the current funded status
of state and local government pension plans.
To determine the structure of state and local pension benefits and
protections, we spoke with experts, advocacy groups, and union
officials from various national organizations and associations, various
federal agencies, and nongovernmental entities that analyze government
data and conduct surveys on these topics. We also conducted site visits
and gathered detailed information about the benefits provided in three
states, California, Michigan, and Oregon. To illustrate a wide range of
retiree benefit system characteristics, in some instances we
complemented information gathered during our site visits with
information gathered about retiree benefits provided in other state and
local jurisdictions. To determine the current funded status of state
and local government pension plans, we analyzed self-reported data from
the Public Fund Survey (PFS) as well as surveys by the Public Pension
Coordinating Council (PPCC).[Footnote 4] We conducted our performance
audits from July 2006 to January 2008 in accordance with generally
accepted government auditing standards, which included an assessment of
data reliability. Those standards require that we plan and perform the
audit to obtain sufficient, appropriate evidence to provide a
reasonable basis for our findings and conclusions based on our audit
objectives. We believe that the evidence obtained provides a reasonable
basis for our findings and conclusions on our audit objectives.
In summary, we found that state and local entities typically provide a
pension plan with defined benefits and a supplemental defined
contribution plan for voluntary savings. As of 2007, most states still
have traditional defined benefit plans as the primary retirement plans
for their workers. Only two states (Alaska and Michigan) and the
District of Columbia had adopted defined contribution plans as their
primary plans for general public employees. Two other states (Indiana
and Oregon) had adopted primary plans with both defined benefit and
defined contribution components, while one state (Nebraska) had adopted
a cash balance defined benefit plan as its primary plan. State statutes
and local ordinances typically protect pension plan benefits, often
including explicit protections such as provisions stating that pensions
promised to public employees cannot be eliminated or diminished. State
constitutions and/or statutes often require pension plans to be managed
as trust funds and overseen by boards of trustees, which typically
establish overall policies for the operation and management of the
pension plans, including adopting actuarial assumptions for calculating
liabilities, establishing procedures for financial control and
reporting, and setting investment strategies. We also found that more
than half of public pension plans reported that they have put enough
assets aside in advance to pay for benefits over the next several
decades. Although many experts consider a funded ratio of about 80
percent or better to be sound for government pensions, the percentage
of pension plans with funded ratios below 80 percent has increased in
recent years. Available data show that 58 percent of 65 large pension
plans were funded to that level in 2006, a decrease since 2000 when
about 90 percent of plans were so funded. A few plans are persistently
and significantly underfunded, and although members of these plans may
not be at risk of losing benefits in the near term, the unfunded
liabilities will have to be made up in the future. Finally, a number of
governments reported not contributing enough to reduce unfunded
liabilities. Low contributions raise concerns about the future funded
status, and may shift costs to future generations.
Background:
Pension plans can generally be characterized as either defined benefit
or defined contribution plans. In a defined benefit plan, the amount of
the benefit payment is determined by a formula typically based on the
retiree's years of service and final average salary, and is most often
provided as a lifetime annuity. For state and local government
retirees, postretirement cost-of-living adjustments (COLAs) are
frequently provided in defined benefit plans. But benefit payments are
generally reduced for early retirement, and in some cases payments may
be offset for receipt of Social Security.[Footnote 5] In a defined
contribution plan, the key determinants of the benefit amount are the
employee's and employer's contribution rates, and the rate of return
achieved on the amounts contributed to an individual's account over
time. The employee assumes the investment risk; the account balance at
the time of retirement is the total amount of funds available, and
unlike with defined benefit plans, there are generally no COLAs. Until
depleted, however, a defined contribution account balance may continue
to earn investment returns after retirement, and a retiree could use
the balance to purchase an inflation-protected annuity. Also, defined
contribution plans are more portable than defined benefit plans, as
employees own their accounts individually and can generally take their
balances with them when they leave government employment. There are no
reductions based on early retirement or for participation in Social
Security.[Footnote 6]
Both government employers and employees generally make contributions to
fund state and local pension benefits. For plans in which employees are
covered by Social Security, the median contribution rate in fiscal year
2006 was 8.5 percent of payroll for employers and 5 percent of pay for
employees, in addition to 6.2 percent of payroll from both employers
and employees to Social Security. For plans in which employees are not
covered by Social Security, the median contribution rate was 11.5
percent of payroll for employers and 8 percent of pay for employees.
Actuaries estimate the amount that will be needed to pay future
benefits. The benefits that are attributable to past service are called
"actuarial accrued liabilities." (In this report, the actuarial accrued
liabilities are referred to as "liabilities." Actuaries calculate
liabilities based on an actuarial cost method and a number of
assumptions including discount rates and worker and retiree mortality.
Actuaries also estimate the "actuarial value of assets" that fund a
plan. (In this report, the actuarial value of assets is referred to
simply as "assets"). The excess of actuarial accrued liabilities over
the actuarial value of assets is referred to as the "unfunded actuarial
accrued liability" or "unfunded liability." Under accounting standards,
such information is disclosed in financial statements. In contrast, the
liability that is recognized on the balance sheet is the cumulative
excess of annual benefit costs over contributions to the plan. Certain
amounts included in the actuarial accrued liability are not yet
recognized as annual benefit costs under accounting standards, as they
are amortized over several years.
State and local government pension plans are not covered by most of the
substantive requirements, or the insurance program operated by the
Pension Benefit Guaranty Corporation (PBGC), under the Employee
Retirement Income Security Act of 1974 (ERISA), which apply to most
private employer benefit plans. Federal law generally does not require
state and local governments to prefund or report on the funded status
of pension plans. However, in order to receive preferential tax
treatment, state and local pensions must comply with requirements of
the Internal Revenue Code. In addition, the retirement income security
of Americans is an ongoing concern of the federal government.
Although ERISA imposes participation, vesting, and other requirements
directly upon employee pension plans offered by private sector
employers, governmental plans such as those provided by state and local
governments to their employees are excepted from these requirements. In
addition, ERISA established an insurance program for defined benefit
plans under which promised benefits are paid (up to a statutorily set
amount) if an employer cannot pay them--but this too does not apply to
governmental plans. However, for participants in governmental pension
plans to receive preferential tax treatment (that is, for plan
contributions and investment earnings to be tax-deferred), plans must
be deemed "qualified" by the Internal Revenue Service.[Footnote 7]
Since the 1980s, the Governmental Accounting Standards Board (GASB) has
maintained standards for accounting and financial reporting for state
and local governments. GASB operates independently and has no authority
to enforce the use of its standards. Still, many state laws require
local governments to follow GASB standards, and bond raters do consider
whether GASB standards are followed. Also, to receive a "clean" audit
opinion under generally accepted accounting principles, state and local
governments are required to follow GASB standards. These standards
require disclosing financial information on pensions, such as the
amount of contributions and the ratio of assets to liabilities.
Three measures are key to understanding pension plans' funded status:
contributions, funded ratios, and unfunded liabilities. According to
experts we interviewed, any single measure at a point in time may give
a dimension of a plan's funded status, but it does not give a complete
picture. Instead, the measures should be reviewed collectively over
time to understand how the funded status is improving or worsening. For
example, a strong funded status means that, over time, the amount of
assets, along with future schedule contributions, comes close to
matching a plan's liabilities.[Footnote 8]
Under GASB reporting standards, the funded status of different pension
plans cannot be compared easily because governments use different
actuarial approaches such as different actuarial cost methods,
assumptions, amortization periods, and "smoothing" mechanisms. Most
public pension plans use one of three "actuarial cost methods," out of
the six GASB approves.[Footnote 9] Actuarial costs methods differ in
several ways. First, each uses a different approach to calculate the
"normal cost," the portion of future benefits that the cost method
allocates to a specific year, resulting in different funding patterns
for each.[Footnote 10] In addition to the cost methods, differences in
assumptions used to calculate the funded status can result in
significant differences among plans that make comparison difficult.
Also differences in amortization periods make it difficult to compare
the funded status of different plans. Finally, actuaries for many plans
calculate the value of current assets based on an average value of past
years. As a result, if the value of assets fluctuates significantly
from year to year, the "smoothed" value of assets changes less
dramatically. Comparing the funded status of plans that use different
smoothing periods can be confusing because the value of the different
plans' assets reflects a different number of years.[Footnote 11]
We reported recently that state and local governments will likely face
daunting fiscal challenges, driven in large part by the growth in
health-related costs, such as Medicaid and health insurance for state
and local employees. Our report was based on simulations for the state
and local government sector that indicated that in the absence of
policy changes, large and growing fiscal challenges will likely emerge
within a decade.[Footnote 12] We found that, as is true for the federal
sector, the growth in health-related costs is a primary driver of these
fiscal challenges.
State And Local Government Pension Plans Typically Include A Defined
Benefit Plan And A Supplemental Voluntary Savings Plan And Laws Protect
Benefits:
State and local governments typically provide their employees with
retirement benefits that include a defined benefit plan and a
supplemental defined contribution plan for voluntary savings. However,
the way each of these components is structured and the level of
benefits provided varies widely--both across states, and within states
based on such things as date of hire, employee occupation, and local
jurisdiction. Statutes and local ordinances protect and manage pension
plans and are often anchored by provisions in state constitutions and
local charters. State and local law also typically requires that
pensions be managed as trust funds and overseen by boards.
Defined Benefit Plans Provide the Core Benefits for Most Retirees:
Most state and local government workers are provided traditional
pension plans with defined benefits. About 90 percent of full-time
state and local employees participated in defined benefit plans as of
1998.[Footnote 13] In fiscal year 2006, state and local government
pension systems covered 18.4 million members and made periodic payments
to 7.3 million beneficiaries, paying out $151.7 billion in benefits.
State and local government employees are generally required to
contribute a percentage of their salaries to their defined benefit
plans, unlike private sector employees, who generally make no
contribution when they participate in defined benefit plans. According
to a 50-state survey conducted by Workplace Economics, Inc., 43 of 48
states with defined benefit plans reported that general state employees
were required to make contributions ranging from 1.25 to 10.5 percent
of their salaries. Nevertheless, these contributions have no influence
on the amount of benefits paid because benefits are based solely on the
formula.
In 1998, all states had defined benefit plans as their primary pension
plans for their general state workers except for Michigan and Nebraska
(and the District of Columbia), which had defined contribution plans as
their primary plans, and Indiana, which combined both defined benefit
and defined contribution components in its primary plan.[Footnote 14]
Almost a decade later, we found that as of 2007, only one additional
state (Alaska) had adopted a defined contribution plan as its primary
plan; one additional state (Oregon) had adopted a combined plan, and
Nebraska had replaced its defined contribution plan with a cash balance
defined benefit plan. (See fig. 1.) Although still providing defined
benefit plans as their primary plans for general state employees, some
states also offer defined contribution plans (or hybrid defined
benefit/defined contribution plans) as optional alternatives to their
primary plans. These states include Colorado, Florida, Montana, Ohio,
South Carolina, and Washington.
Figure 1: Types of Pension Plans in Place for Newly Hired General State
Employees, as of 2007:
[See PDF for image]
This figure is a map of the United States depicting the types of
pension plans in place for newly hired general state employees, as of
2007 in the following four categories:
Traditional defined benefit:
Alabama;
Arizona;
Arkansas;
California;
Colorado;
Connecticut;
Delaware;
District of Columbia;
Florida;
Georgia;
Hawaii;
Idaho;
Illinois;
Iowa;
Kansas;
Kentucky;
Louisiana;
Maine;
Maryland;
Massachusetts;
Minnesota;
Mississippi;
Missouri;
Montana;
Nevada;
New Hampshire;
New Jersey;
New Mexico;
New York;
North Carolina;
North Dakota;
Ohio;
Oklahoma;
Pennsylvania;
Rhode Island;
South Carolina;
South Dakota;
Tennessee;
Texas;
Utah;
Vermont;
Virginia;
Washington;
West Virginia;
Wisconsin;
Wyoming.
Cash balance defined benefit:
Nebraska.
Combined (with both definite benefit and defined contribution
components):
Indiana;
Oregon.
Defined contribution:
Alaska;
Michigan.
Note: Plans depicted are those in which newly hired general state
employees in each state are required to participate as their primary
pension plan. In some states, employees may opt to participate in
alternative or supplementary defined contribution plans, but
participation in these plans is not mandatory.
[End of figure]
In states that have adopted defined contribution plans as their primary
plans, most employees continue to participate in defined benefit plans
because employees are allowed to continue their participation in their
previous plans (which is rare in the private sector).[Footnote 15]
Thus, in contrast to the private sector, which has moved increasingly
away from defined benefit plans over the past several decades, the
overwhelming majority of states continue to provide defined benefit
plans for their general state employees.
Most states have multiple pension plans providing benefits to different
groups of state and local government workers based on occupation (such
as police officer or teacher) and/or local jurisdiction. According to
the most recent Census data available, in fiscal year 2004-2005 there
were a total of 2,656 state and local government pension plans. We
found that defined benefit plans were still prevalent for most of these
other state and local employees as well. For example, a nationwide
study conducted by the National Education Association in 2006 found
that of 99 large pension plans serving teachers and other school
employees, 79 were defined benefit plans, 3 were defined contribution
plans, and the remainder offered a range of alternative, optional, or
combined plan designs with both defined benefit and defined
contribution features.
In addition to primary pension plans (whether defined benefit or
defined contribution), data we gathered from various national
organizations show that each of the 50 states has also established a
defined contribution plan as a supplementary, voluntary option for tax-
deferred retirement savings for their general state employees. Such
plans appear to be common among other employee groups as well.[Footnote
16] These supplementary defined contribution plans are typically
voluntary deferred compensation plans under section 457(b) of the
federal tax code.[Footnote 17]
While these defined contribution plans are fairly universally
available, state and local worker participation in the plans has been
modest. In a 2006 nationwide survey conducted by the National
Association of Government Defined Contribution Administrators, the
average participation rate for all defined contribution plans was 21.6
percent.
One reason cited for low participation rates in these supplementary
plans is that, unlike in the private sector, it has been relatively
rare for employers to match workers' contributions to these plans, but
the number of states offering a match has been increasing. According to
a state employee benefit survey of all 50 states conducted by Workplace
Economics, Inc., in 2006 12 states matched the employee's contribution
up to a specified percent or dollar amount.[Footnote 18] Among our site
visit states, none made contributions to the supplementary savings
plans for their general state employees, and employee participation
rates generally ranged between 20 to 50 percent. In San Francisco,
however, despite the lack of an employer match, 75 percent of employees
had established 457(b) accounts. The executive director of the city's
retirement system attributed this success to several factors, including
(1) that the plan had been in place for over 25 years, (2) that the
plan offers good investment options for employees to choose from, and
(3) that plan administrators have a strong outreach program. In the
private sector, a growing number of employers are attempting to
increase participation rates and retirement savings in defined
contribution plans by automatically enrolling workers and offering new
types of investment funds.[Footnote 19]
Laws Protecting Pensions Are often Anchored in State Constitutions and
Local Charters:
State and local laws generally provide the most direct source of any
specific legal protections for the pensions of state and local workers.
Provisions in state constitutions often protect pensions from being
eliminated or diminished. In addition, constitutional provisions often
specify how pension funds are to be managed, such as by mandating
certain funding requirements and/or requiring that the funds be
overseen by boards of trustees.[Footnote 20] Moreover, we found that at
the sites we visited, locally administered plans were generally
governed by local laws. However, state employees, as well as the vast
majority of local employees, are covered by state-administered plans.
Protections for pensions in state constitutions are the strongest form
of legal protection states can provide because constitutions--which set
out the system of fundamental laws for the governance of each state--
preempt state statutes and are difficult to change. Furthermore,
changing a state constitution usually requires broad public support.
For example, often a supermajority (such as three-fifths) of a state's
legislature may need to first approve proposed constitutional changes
and typically if a change passes the legislature, voters must also
approve it.
The majority of states have some form of constitutional protection for
their pensions. According to AARP data compiled in 2000, 31 states have
a total of 93 constitutional provisions explicitly protecting pensions.
[Footnote 21] (The other 19 states all have pension protections in
their statutes or recognize legal protections under common law.) These
constitutional pension provisions prescribe some combination of how
pension trusts are to be funded, protected, managed, or governed. (See
table 1.)
Table 1: Constitutional Protections for Pension Benefits:
Constitutional provisions requiring: Certain standards are to be in
place for how the retirement system should be funded;
States: Arizona, Florida, Georgia, Louisiana, Maine, Michigan,
Mississippi, Montana, New Hampshire, New Mexico, North Dakota, South
Carolina, Texas, and Virginia;
Number of states: 14.
Constitutional provisions requiring: Assets in a trust fund are to be
for the exclusive purpose of the retirement system;
States: Alabama, Arizona, California, Louisiana, Maine, Mississippi,
Montana, New Hampshire, New Mexico, North Carolina, Oklahoma, Texas,
Virginia, and Wyoming;
Number of states: 14.
Constitutional provisions requiring: Trust fund assets are not to be
diverted for nonretirement uses;
States: Alabama, Louisiana, Maine, Mississippi, Montana, Nevada, New
Hampshire, New Mexico, North Carolina, Oklahoma, South Carolina, Texas,
and Virginia;
Number of states: 13.
Constitutional provisions requiring: Retirement system boards of
trustees are to be off limits to the legislature;
States: California, Montana, Nevada, New Mexico, and Texas;
Number of states: 5.
Constitutional provisions requiring: Participants in a retirement
system have a guaranteed right to a benefit, and that accrued financial
benefits cannot be eliminated or diminished;
States: Alaska, Arizona, Hawaii, Illinois, Louisiana, Michigan,
Missouri, New Mexico, and New York;
Number of states: 9.
Constitutional provisions requiring: States have investment authority
for their retirement systems;
States: Indiana, Michigan, Montana, Nebraska, South Carolina,
Washington, and West Virginia;
Number of states: 7.
Constitutional provisions requiring: Retirement system money is to be
held in a separate trust fund;
States: Arizona, California, Nevada, New Mexico, and Virginia;
Number of states: 5.
Constitutional provisions requiring: Retirement benefits may be
increased;
States: Georgia, Nebraska, Pennsylvania, Washington, and Wisconsin;
Number of states: 5.
Constitutional provisions requiring: A retirement system is required;
States: Louisiana, Texas, and Virginia;
Number of states: 3.
Constitutional provisions requiring: The payment of retirement benefits
is authorized;
States: Georgia and Oklahoma;
Number of states: 2.
Constitutional provisions requiring: Other protections are in place,
such as prohibiting constitutional changes to the retirement system
through the initiative process;
States: Mississippi, Missouri, Nebraska, and Nevada;
Number of states: 4.
Source: AARP, 2000.
[End of table]
Pensions Benefits, Once Accrued, Are Generally Protected:
In nine states, constitutional provisions take the form of a specific
guarantee of the right to a benefit. In two of the states we visited,
the state constitution provided protection for pension benefits. In
California, for example, the state constitution provides that public
plan assets are trust funds to be used only for providing pension
benefits to plan participants.[Footnote 22] In Michigan, the state
constitution provides that public pension benefits are contractual
obligations that cannot be diminished or impaired and must be funded
annually.[Footnote 23]
The basic features of pension plans--such as eligibility,
contributions, and types of benefits--are often spelled out in state or
local statute. State-administered plans are generally governed by state
laws. For example, in California, the formulas used to calculate
pension benefit levels for employees participating in the California
Public Employees' Retirement System (CalPERS) are provided in state
law.[Footnote 24] Similarly, in Oregon, pension benefit formulas for
state and local employees participating in the Oregon Public Employees
Retirement System (OPERS) plans are provided in state statute.[Footnote
25] In addition, we found that at the sites we visited locally
administered plans were generally governed by local laws. For example,
in San Francisco, contribution rates for employees participating in the
San Francisco City and County Employees' Retirement System are spelled
out in the city charter.[Footnote 26]
Legal protections usually apply to benefits for existing workers or
benefits that have already accrued; thus, state and local governments
generally can change the benefits for new hires by creating a series of
new tiers or plans that apply to employees hired only after the date of
the change. For example, the Oregon legislature changed the pension
benefit for employees hired on or after January 1, 1996, and again for
employees hired on or after August 29, 2003, each time increasing the
retirement age for the new group of employees.
For some state and local workers whose benefit provisions are not laid
out in detail in state or local statutes, specific provisions are left
to be negotiated between employers and unions.[Footnote 27] For
example, in California, according to state officials, various benefit
formula options for local employees are laid out in state statutes, but
the specific provisions adopted are generally determined through
collective bargaining between the more than 1,500 different local
public employers and rank-and-file bargaining units. In all three
states we visited, unions also lobby the state legislature on behalf of
their members. For example, in Michigan, according to officials from
the Department of Management and Budget, unions marshal support for or
against a proposal by taking such actions as initiating letter-writing
campaigns to support or oppose legislative measures.
Pensions Are Typically Managed as Trust Funds with Board Oversight:
In accordance with state constitution and/or statute, the assets of
state and local government pension plans are typically managed as
trusts and overseen by boards of trustees to ensure that the assets are
used for the sole purpose of meeting retirement system obligations and
that the plans are in compliance with the federal tax code.[Footnote
28] Boards of trustees, of varying size and composition, often serve
the purpose of establishing the overall policies for the operation and
management of the pension plans, which can include adopting actuarial
assumptions, establishing procedures for financial control and
reporting, and setting investment strategy. On the basis of our
analysis of data from the National Education Association, the National
Association of State Retirement Administrators (NASRA), and reports and
publications from selected states, we found that 46 states had boards
overseeing the administration of their pension plans for general state
employees.[Footnote 29] These boards ranged in size from 5 to 19
members, with various combinations of those elected by plan members,
those appointed by a state official, and those who serve automatically
based on their office in state government (known as ex officio
members). (See fig. 2.)
Figure 2: Various Interests Represented on Boards of Each State's
Pension Plan for General State Employees:
[See PDF for image]
This figure is a pie-chart depicting the following data:
Appointed: 43 of 50 plans have appointed board members representing
various groups or areas of expertise, such as an investment specialist:
51.7%.
Elected: 24 of 50 plans have board members elected by various groups,
such as retired or active plan members: 29.1%.
Ex officio: 36 of 50 plans have ex officio board members who serve
automatically based on their office, such as the treasurer from the
state or local jurisdiction: 19.1%.
Source: GAO analysis of board membership for the primary pension plans
for general state employees in each state, based on data from various
national organizations and from individual states' reports and
publications.
Note: Percentages do not total 100 because of rounding.
[End of figure]
Different types of members bring different perspectives to bear, and
can help to balance competing demands on retirement system resources.
For example, board members who are elected by active and retired
members of the retirement system, or who are union members, generally
help to ensure that members' benefits are protected. Board members who
are appointed sometimes are required to have some type of technical
knowledge, such as investment expertise. Finally, ex officio board
members generally represent the financial concerns of the state
government.
Some pension boards do not have each of these perspectives represented.
For example, boards governing the primary public employee pension plans
in all three states we visited had various compositions and
responsibilities. (See table 2.) At the local level, in Detroit,
Michigan, a majority of the board of Detroit's General Retirement
System is composed of members of the system. According to officials
from the General Retirement System, this is thought to protect pension
plan assets from being used for purposes other than providing benefits
to members of the retirement system. Regarding responsibilities, the
board administers the General Retirement System and, as specified in
local city ordinances, is responsible for the system's proper operation
and investment strategy.
Table 2: Composition and Responsibilities of Boards of Primary Public
Employee Pension Plans in California, Michigan, and Oregon:
State: California;
Pension plan: California Public Employees' Retirement System (CalPERS);
Number of board members: 13;
Composition of board members: 3 appointed; 6 elected; 4 ex officio[A];
Board responsible for: Management and control of CalPERS, including the
exclusive control of the administration and investment of the
retirement fund.[B].
State: Michigan;
Pension plan: Michigan State Employees' Retirement System (MSERS);
Number of board members: 9;
Composition of board members: 4 appointed; 5 ex officio[C];
Board responsible for: Administering and managing the defined benefit
plan by making investment decisions and arranging for an actuarial
valuation.[D].
State: Oregon;
Pension plan: Oregon Public Employees' Retirement System (OPERS);
Number of board members: 5;
Composition of board members: 5 appointed[E];
Board responsible for: Managing the retirement system, including
responsibilities such as arranging for actuarial services and
publishing an annual report on the retirement system.
Source: Statutes, as cited below.
[A] Cal. Govt. Code � 20090 (Deering, 2007).
[B] Cal. Gov't. Code � 20120 (Deering, 2007).
[C] Mich. Comp. Laws � 38.3 (2007).
[D] Mich. Comp. Laws � 38.2 (2007). The defined contribution plan is
administered and its assets invested by the state treasurer. Mich.
Comp. Laws � 38.9 (2007).
[E] Or. Rev. Stat. � 238.660 (2005).
[End of table]
Pension boards of trustees typically serve as pension plan fiduciaries,
and as fiduciaries, they usually have significant independence in terms
of how they manage the funds. Boards make policy decisions within the
framework of the plan's enabling statutes, which may include adopting
actuarial assumptions,[Footnote 30] establishing procedures for
financial control and reporting, and setting investment policy. In the
course of managing pension trusts, boards generally obtain the services
of independent advisors, actuaries, or investment professionals.
Also, some states' pension plans have investment boards in addition to,
or instead of, general oversight boards. For example, three of the four
states without general oversight boards have investment boards
responsible for setting investment policy. While public employees may
have a broad mandate to serve all citizens, board members generally
have a fiduciary duty to act solely in the interests of plan
participants and beneficiaries. One study of approximately 250 pension
plans at the state and local level found that plans with boards
overseeing them were associated with greater funding than those without
boards.[Footnote 31]
When state pension plans do not have a general oversight board, these
responsibilities tend to be handled directly by legislators and/or
senior executive officials. For example, in the state of Washington,
the pension plan for general state employees is overseen by the Pension
Funding Council--a six-member body whose membership, by statute,
includes four state legislators.[Footnote 32] The council adopts
changes to economic assumptions and contribution rates for state
retirement systems by majority vote. In Florida, the Florida Retirement
System is not overseen by a separate independent board; instead, the
pension plan is the responsibility of the State Board of
Administration, composed of the governor, the chief financial officer
of the state, and the state attorney general.[Footnote 37] In New York,
the state comptroller, an elected official, serves as sole trustee and
administrative head of the New York State and Local Employees'
Retirement System.[Footnote 33]
Most Public Pensions Have Assets To Pay Benefits Over Several Decades,
But Contributions Vary:
Currently, most state and local government pension plans have enough
invested resources set aside to pay for the benefits they are scheduled
to pay over the next several decades. Many experts consider a funded
ratio of about 80 percent or better to be sound for state and local
government pensions. While most plans' funding may be sound, a few
plans have persistently reported low funded ratios, which will
eventually require the government employer to improve funding, for
example, by reducing benefits or by increasing contributions. Even for
many plans with lower funded ratios, benefits are generally not at risk
in the near term because current assets and new contributions may be
sufficient to pay benefits for several years. Still, many governments
have often contributed less than the amount need to improve or maintain
funded ratios. Low contributions raise concerns about the future funded
status, and may shift costs to future generations.
Most Public Pension Plans Have Enough Funds to Pay for Benefits over
the Long-Term:
Most public pension plans report having sufficient assets to pay for
retiree benefits over the next several decades. Many experts and
officials to whom we spoke consider a funded ratio of 80 percent to be
sufficient for public plans for a couple of reasons.[Footnote 34]
First, it is unlikely that public entities will go out of business or
cease operations as can happen with private sector employers, and state
and local governments can spread the costs of unfunded liabilities over
a period of up to 30 years under current GASB standards. In addition,
several commented that it can be politically unwise for a plan to be
overfunded; that is, to have a funded ratio over 100 percent. The
contributions made to funds with "excess" assets can become a target
for lawmakers with other priorities or for those wishing to increase
retiree benefits.
More than half of state and local governments' plans reviewed by the
Public Fund Survey (PFS) had a funded ratio of 80 percent or better in
fiscal year 2006, but the percentage of plans with a funded ratio of 80
percent or better has decreased since 2000, as shown in figure
3.[Footnote 35] Our analysis of the PFS data on 65 self-reported state
and local government pension plans showed that 38 (58 percent) had a
funded ratio of 80 percent or more, while 27 (42 percent) had a funded
ratio of less than 80 percent. In the early 2000s, according to one
study, the funded ratio of 114 state and local government pension plans
together reached about 100 percent; it has since declined. [Footnote
36] In fiscal year 2006, the aggregate funded ratio was about 86
percent. Some officials attribute the decline in funded ratios since
the late 1990s to the decline of the stock market, which reduced the
value of assets. This sharp decline would likely affect funded ratios
for several years because most plans use smoothing techniques to
average out the value of assets over several years. Our analysis of
several factors affecting the funded ratio showed that changes in
investment returns had the most significant impact on the funded ratio
between 1988 and 2005, followed by changes in liabilities.[Footnote 37]
Figure 3: Percentage of State and Local Government Pension Plans with
Funded Ratios above or below 80 Percent, by Fiscal Year:
[See PDF for image]
This figure is a stacked vertical bar graph depicting the following
data:
Fiscal year: 1994;
Funding ratio less than 80 percent: 40%;
Funding ratio 80 percent or more: 60%.
Fiscal year: 1996;
Funding ratio less than 80 percent: 31.25%;
Funding ratio 80 percent or more: 68.75%.
Fiscal year: 2000;
Funding ratio less than 80 percent: 8.9%;
Funding ratio 80 percent or more: 91.1%.
Fiscal year: 2001;
Funding ratio less than 80 percent: 10.6%;
Funding ratio 80 percent or more: 89.4%.
Fiscal year: 2002;
Funding ratio less than 80 percent: 16.7%;
Funding ratio 80 percent or more: 83.3%.
Fiscal year: 2003;
Funding ratio less than 80 percent: 22.7%;
Funding ratio 80 percent or more: 77.3%.
Fiscal year: 2004;
Funding ratio less than 80 percent: 25.8%;
Funding ratio 80 percent or more: 74.2%.
; " 33.8462 66.1538
Funding ratio less than 80 percent: 33.8%;
Funding ratio 80 percent or more: 66.2%.
Fiscal year: 2006;
Funding ratio less than 80 percent: 41.5%;
Funding ratio 80 percent or more: 58.5%.
Source: GAO analysis of PFS, PENDAT data.
[End of figure]
Although most plans report being soundly funded in 2006, a few have
been persistently underfunded, and some plans have seen funded ratio
declines in recent years.[Footnote 38] We found that several plans in
our data set had funded ratios below 80 percent in each of the years
for which data is available. Of 70 plans in our data set, 6 had funded
ratios below 80 percent for 9 years between 1994 and 2006. Two plans
had funded ratios below 50 percent for the same time period. In
addition, of the 27 plans that had funded ratios below 80 percent in
2006, 15 had lower funded ratios in 2006 than in 1994. The sponsors of
these plans may be at risk in the future of increased budget pressures.
By themselves, lower funded ratios and unfunded liabilities do not
necessarily indicate that benefits for current plan members are at
risk, according to experts we interviewed. Unfunded liabilities are
generally not paid off in a single year, so it can be misleading to
review total unfunded liabilities without knowing the length of the
period over which the government plans to pay them off. Large unfunded
liabilities may represent a fiscal challenge, particularly if the
period to pay them off is short. But all unfunded liabilities shift the
responsibility for paying for benefits accrued in past years to the
future.
Unfunded liabilities will eventually require the government employer to
increase revenue, reduce benefits or other government spending, or do
some combination of these. Revenue increase could include higher taxes,
returns on investments, or employee contributions. Nevertheless, we
found that unfunded liabilities do not necessarily imply that pension
benefits are at risk in the near term. Current funds and new
contributions may be sufficient to pay benefits for several years, even
when funded rations are relatively low.
Some Pension Sponsors Do Not Contribute Enough to Improve Funding
Status:
A number of governments reported not contributing enough to keep up
with yearly costs. Governments need to contribute the full annual
required contribution (ARC) yearly to maintain the funded ratio of a
fully funded plan or improve the funded ratio of a plan with unfunded
liabilities.[Footnote 39] In fiscal year 2006, the sponsors of 46
percent of the 70 plans in our data set contributed less than 100
percent of the ARC, as shown in figure 4, including 39 percent that
contributed less than 90 percent of the ARC. In fact, the percentage of
governments contributing less than the full ARC has risen in recent
years. This continues a trend in recent years of about half of
governments making full contributions.
Figure 4: Percentage of State and Local Government Pension Plans for
which Governments Contributed More or Less Than 100 Percent of the ARC,
by Fiscal Year:
[See PDF for image]
This figure is a stacked vertical bar graph depicting the following
data:
Fiscal year: 1994;
Funding ratio Less than 100 percent of the ARC: 89.2%;
Funding ratio 100 percent or more of the ARC: 10.8%.
Fiscal year: 1996;
Funding ratio Less than 100 percent of the ARC: 16.9%;
Funding ratio 100 percent or more of the ARC: 83.1%.
Fiscal year: 2000;
Funding ratio Less than 100 percent of the ARC: 25.8%;
Funding ratio 100 percent or more of the ARC: 74.2%.
Fiscal year: 2001;
Funding ratio Less than 100 percent of the ARC: 19.7%;
Funding ratio 100 percent or more of the ARC: 80.3%.
Fiscal year: 2002;
Funding ratio Less than 100 percent of the ARC: 35.2%;
Funding ratio 100 percent or more of the ARC: 64.8%.
Fiscal year: 2003;
Funding ratio Less than 100 percent of the ARC: 43.7%;
Funding ratio 100 percent or more of the ARC: 56.3%.
Fiscal year: 2004;
Funding ratio Less than 100 percent of the ARC: 49.3%;
Funding ratio 100 percent or more of the ARC: 50.7%.
Fiscal year: 2005;
Funding ratio Less than 100 percent of the ARC: 48.6%;
Funding ratio 100 percent or more of the ARC: 51.4%.
Fiscal year: 2006;
Funding ratio Less than 100 percent of the ARC: 45.7%;
Funding ratio 100 percent or more of the ARC: 54.3%.
Source: GAO analysis of PFS, PENDAT data.
[End of figure]
In particular, some of the governments that did not contribute the full
ARC in multiple years were sponsors of plans with lower funded ratios.
In 2006, almost two-thirds of plans with funded ratios below 80 percent
in 2006 did not contribute the full ARC in multiple years. Of the 32
plans that in 2006 had funded ratios below 80 percent, 20 did not
contribute the full ARC in more than half of the 9 years for which data
is available. In addition, 17 of these governments did not contribute
more than 90 percent of the full ARC in more than half the years.
State and local government pension representatives told us that
governments may not contribute the full ARC each year for a number of
reasons. First, when state and local governments are under fiscal
pressure, they may have to make difficult choices about paying for
competing interests. State and local governments will likely face
increasing fiscal challenges in the next several years as the cost of
health care continues to rise. In light of this stress, the ability of
some governments to continue to pay the ARC may be questioned. Second,
changes in the value of assets can affect governments' expectations
about how much they will have to contribute. Moreover, some plans have
contribution rates that are fixed by constitution, statute, or practice
and do not change in response to changes in the ARC. Even when the
contribution rate is not fixed, the political process may take time to
recognize and act on the need for increased contributions. Nonetheless,
many states have been increasing their contribution rates in recent
years, according to information compiled by the National Conference of
State Legislatures. Third, some governments may not contribute the full
ARC because they are not committed to prefunding their pension plans
and instead have other priorities.
When a government contributes less than the full ARC, the funded ratio
can decline and unfunded liabilities can rise, if all other assumptions
are met about the change in assets and liabilities.[Footnote 40]
Increased unfunded liabilities will require larger contributions in the
future to keep pace with the liabilities that accrue each year and to
make up for liabilities that accrued in the past. As a result, costs
are shifted from current to future generations.
Conclusions:
The funded status of state and local government pensions overall is
reasonably sound, though recent deterioration underscores the
importance of keeping up with contributions. Since the stock market
downturn in the early 2000s, the funded ratios of some governments have
declined. Although governments can gradually recover from these losses,
the failure of some to consistently make the annual required
contributions undermines that progress and is cause for concern. This
is especially important as state and local governments face increasing
fiscal pressure in the coming decades.
The ability to maintain current levels of public sector retiree
benefits will depend, in large part, on the nature and extent of the
fiscal challenges these governments face in the years ahead. As state
and local governments begin to comply with GASB accounting and
reporting standards, information about the future costs of retiree
health benefits will become more transparent. In light of the initial
estimates of the cost of future retiree health benefits, state and
local governments will likely have to find new strategies for dealing
with their unfunded liabilities. Although public sector workers have
thus far been relatively shielded from many of the changes that have
occurred in private sector defined benefit commitments, these
protections could undergo revision under the pressure of overall future
fiscal commitments.
We are continuing our work on state and local government retiree
benefits. We have two engagements underway; the first study will
examine the various approaches these governments are taking to address
their retiree health care liabilities, while the second examines the
ways state and local governments allocate the assets in their pension
and retiree health care funds. We are pleased that this committee is
interested in our work and look forward to working with you in the
future.
That concludes my testimony: I would be pleased to respond to any
questions the committee has.
Contacts and Acknowledgments:
For further information regarding this testimony, please contact
Barbara D. Bovbjerg, Director, Education, Workforce, and Income
Security Issues at (202) 512-7215 or [email protected]. Contact points
for our Offices of Congressional Relations and Public Affairs may be
found on the last page of this statement. Individuals making key
contributions to this testimony include Tamara Cross (Assistant
Director), Bill Keller (Assistant Director), Anna Bonelli, Margie
Shields, Joe Applebaum, and Craig Winslow.
[End of section]
Footnotes:
[1] Actuarial accrued liabilities, referred to in this testimony as
"liabilities," are the portion of the present value of future benefits
that is attributable to employee services in past periods, under the
actuarial cost method utilized.
[2] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-1156]
(Washington, D.C.: Sept. 24, 2007).
[3] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-223]
(Washington, D.C.: Jan. 29, 2008).
[4] The PFS is sponsored by the National Association of State
Retirement Administrators and the National Council on Teacher
Retirement. In 2005, the PFS data we used represented 58 percent of
total assets invested in public pension plans nationwide, and 72
percent of total members. PFS data covered years beginning with 2001.
PPCC data covered years 1994, 1996, and 2000.
[5] Unlike in the private sector, there are large groups of state and
local government workers who are not covered by Social Security.
According to data from the Social Security Administration, about 30
percent of all state and local government workers nationwide are not
covered, although the extent of coverage varies widely by state and by
occupation.
[6] There could, however, be federal tax penalties if funds are
withdrawn before the employee reaches a certain age. 26 U.S.C. � 72(t).
[7] Contributions to qualified pension plans that meet certain
requirements--whether defined benefit or defined contribution--are not
counted as taxable income to employees when the contributions are made.
However, when pension benefits are paid, amounts not previously taxed
are subject to federal and perhaps state tax. This also applies to the
interest income such contributions generate.
[8] For more extensive information on the three key measures see State
and Local Government Retiree Benefits: Current Funded Status of Pension
and Health Benefits, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-
08-223] (Washington, D.C.: Jan. 29, 2008).
[9] The three most commonly used actuarial cost methods are the
projected unit credit (projected benefits of each employee covered by
the plan are allocated by a consistent formula to valuation years);
entry age normal (the current value of future benefits of each employee
is allocated on a level basis over the earnings or service of the
employee between entry age and assumed exit age); and aggregate (the
excess of the value of future benefits of all employees over the
current value of assets is allocated on a level basis over the earnings
or service of the group between the valuation date and assumed exit.
This allocation is performed for the group as a whole, not as a sum of
individual allocations).
[10] Actuarial cost methods are used to allocate the current value of
future benefits into amounts attributable to the past, to the current
year, and to future years. The cost of future benefits that are
attributable to past years under the actuarial cost method is called
the actuarial accrued liability (AAL), while the cost of benefits
accrued under the cost method in the current year is known as the
normal cost.
[11] For more extensive information on the actuarial cost methods and
comparisons see State and Local Government Retiree Benefits: Current
Funded Status of Pension and Health Benefits, [hyperlink,
http://www.gao.gov/cgi-bin/getrpt?GAO-08-223] (Washington, D.C.: Jan.
29, 2008).
[12] GAO, State and Local Governments: Persistent Fiscal Challenges
Will Likely Emerge within the Next Decade, [hyperlink,
http://www.gao.gov/cgi-bin/getrpt?GAO-07-1080SP] (Washington, D.C.:
July 18, 2007).
[13] The last year for which the Bureau of Labor Statistics published
these data was 1998. U.S. Department of Labor, Bureau of Labor
Statistics, Employee Benefits in State and Local Governments, 1998
(Washington, D.C.: 2000).
[14] See GAO, State and Pension Plans: Similarities and Differences
Between Federal and State Designs, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO/GGD-99-45] (Washington, D.C.:Mar. 19, 1999). Also, as of
1998, across all state and local employees nationwide, Bureau of Labor
Statistics survey data indicate that 90 percent were covered by defined
benefit plans.
[15] In the private sector, when a new plan is adopted, the previous
plan is often frozen. Existing employees keep the benefits they have
accrued to date, but cannot continue to participate in the previous
plan from that point forward. In the public sector, when a new plan is
adopted, existing employees generally are allowed to continue to
participate in the previous plan. Generally only new employees, hired
after adoption of the new plan, are required to participate in the new
plan from that point forward.
[16] In addition, over the past 10 years, many public sector employers
have established deferred retirement options plans (DROP). DROPs were
created to retain experienced employees by permitting those eligible to
retire to stay on the job and earn a lump-sum payment at retirement in
addition to their defined benefit annuity.
[17] 26 U.S.C. � 457(b).
[18] The Workplace Economics, Inc. 2006 survey instructed states to
provide information on benefits that cover the largest number of
employees, or that were otherwise deemed representative.
[19] GAO, Employer-Sponsored Health and Retirement Benefits: Efforts to
Control Employer Costs and the Implications for Workers, [hyperlink,
http://www.gao.gov/cgi-bin/getrpt?GAO-07-355] (Washington, D.C.: Mar.
30, 2007).
[20] Given the ways in which defined contribution plans differ from
defined benefit plans, these types of provisions may be less readily
applicable or relevant to them.
[21] Although the AARP study focused on pension plans for a particular
group of public employees (retired educators), our analysis revealed
that the provisions identified in all but two states were applicable to
pension plans for all state employees. In addition, we learned that
subsequent to this study, Oregon adopted a constitutional provision in
2003 to authorize the issuance of pension obligation bonds.
[22] Cal. Const., art. XVI � 17.
[23] Mich. Const., art. IX �19 and 24.
[24] For example, see Cal. Gov't. Code � 21353 (Deering 2007).
[25] Or. Rev. Stat. � 238.300 (2005).
[26] San Francisco City Charter A8.525.
[27] The influence of unions on public employees benefits is stronger
than in the private sector. Over 40 percent of public sector workers--
including federal, state, and local government--are covered by union
agreements, compared with about 10 percent of private sector workers.
[28] A trust established by an employer for the exclusive benefit of
its employees, and any income it generates, is exempt from federal
income tax. 26 U.S.C. � 501(a).
[29] The four states that do not have boards overseeing the operation
and management of their pension plans for general state employees are
Florida, Iowa, New York, and Washington. (In addition, the District of
Columbia does not have a board overseeing its pension plan for its
general employees.)
[30] Actuarial assumptions are assumptions as to the occurrence of
future events affecting pension costs, such as mortality, retirement,
and rates of investment earnings.
[31] Marquerite Schneider and Fariborz Damanpour, "Public Choice
Economics and Public Pension Plan Funding: An Empirical Test,"
Administration and Society, vol. 34, no. 1 (2002).
[32] Wash. Rev. Code �41.45.100 (2007).
[33] Fla. Stat. � 215.44 (2007).
[34] The Pension Protection Act of 2006 provided that large private
sector pension plans will be considered at risk of defaulting on their
liabilities if they have less than 80 percent funded ratios under
standard actuarial assumptions and less than 70 percent funded ratios
under certain additional "worst-case" actuarial assumptions. When
private sector plans default on their liabilities, PBGC becomes liable
for benefits. These funding standards will be phased in, becoming fully
effective in 2011, and at-risk plans are required to use stricter
actuarial assumptions that will result in them having to make larger
plan contributions. Pub. L. No. 109-280, sec. 112(a), � 430(i), 120
Stat. 780, 839-42.
[35] In this section, we refer to our analysis of the PFS and PENDAT
database. The PFS is sponsored by the National Association of State
Retirement Administrators and the National Council on Teacher
Retirement. These sources contain self-reported data on state and local
government pension plans in years 1994, 1996, and 2000 to 2006. Each
year, between 62 and 72 plans were represented in our dataset. In 2005,
the 70 plans represented 58 percent of total assets invested in public
pension plans nationwide in 2005, and 72 percent of total members
[36] K. Brainard, Public Fund Survey Summary of Findings for FY 2006,
National Association of State Retirement Administrators (Georgetown,
Tex.: October 2007).
[37] These findings may be unique to the time period examined (1988-
2005). In other periods, other factors, such as changes to benefits,
may account for more of the change in the funded ratio than the rates
of return on the investment portfolio.
[38] Reports estimate total unfunded liabilities for public pension
plans nationwide between $307 and $385 billion, but the estimates do
not cover all state and local government plans. One study by the
National Association of State Retirement Administrators reviewed the
funding status of 125 of the nation's large public pension plans in
fiscal year 2006 and found total unfunded liabilities to be more than
$385 billion. Another study reviewed state-only pension plans and found
that in 2005, the most recent year for which substantially complete
data was available, total unfunded liabilities for 108 plans were about
$307 billion. Neither study is a random sample of state and local
government pension plans that represents all public plans nationwide.
NASRA Public Fund Survey (2006). This estimate represents 85 percent of
public plan assets nationwide. Wilshire Consulting, 2007 Wilshire
Report on State Retirement Systems: Funding Levels and Asset Allocation
(2007). This study includes only state plans, not local plans.
[39] The ARC is made up of the amount of future benefits promised to
plan participants that accumulated in the current year, plus a portion
of any unfunded liabilities. Although the ARC refers to the annual
required contribution, the use of the word "required" can be misleading
because governments can choose to pay more or less than this amount.
[40] When a government does not contribute at least the normal cost
plus interest on the unfunded liability (which is an amount less than
the full ARC), unfunded liabilities will increase.
[End of section]
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