Hostname: page-component-8448b6f56d-mp689 Total loading time: 0 Render date: 2024-04-19T08:21:24.468Z Has data issue: false hasContentIssue false
  • English
  • Français

Public pension funding in practice

Published online by Cambridge University Press:  12 April 2011

ALICIA H. MUNNELL ,
JEAN-PIERRE AUBRY  and
LAURA QUINBY
ALICIA H. MUNNELL
Affiliation:
Center for Retirement Research at Boston College (e-mail: laura.quinby@bc.edu)
JEAN-PIERRE AUBRY
Affiliation:
Center for Retirement Research at Boston College (e-mail: laura.quinby@bc.edu)
LAURA QUINBY
Affiliation:
Center for Retirement Research at Boston College (e-mail: laura.quinby@bc.edu)
Get access Rights & Permissions [Opens in a new window]

Abstract

Public pension funding has recently become a front-burner policy issue in the wake of the financial crisis and given the pending retirement of large numbers of baby boomers. This paper examines the current funding of state and local pensions using a sample of 126 plans, estimating an aggregate funded ratio in 2009 of 78% using GASB accounting methods. Projections for 2010–2013 suggest that some continued deterioration is likely. Funded status can vary significantly among plans, and so the paper explores the influence of four types of factors: funding discipline, plan governance, plan characteristics, and the fiscal situation of the state. Judging the long-term health of plans requires more than just a snapshot of assets and liabilities, and so the paper examines how well plans are meeting their Annual Required Contributions and what factors influence whether they make them. The paper also addresses the controversy over what discount rate to use for valuing liabilities, concluding that using a riskless rate of return could help improve funding discipline but would need to be implemented in a manageable way. Finally, the paper assesses whether plans face a near-term liquidity crisis and finds that most have assets on hand to cover benefits over the next 15–20 years. The bottom line is that, like private investors, public plans have been hit hard by the financial crisis and their full recovery is dependent on the rebound of the economy and the stock market.

Type
Articles
Information
Journal of Pension Economics & Finance , Volume 10 , Issue 2 , April 2011 , pp. 247 - 268
Copyright
Copyright © Cambridge University Press 2011

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Brown, J. R. and Wilcox, D. (2009) Discounting state and local pension liabilities. American Economic Review: Papers and Proceedings, 99(2): 538–542.Google Scholar
Bohn, Henning and Inman, Robert P. (1996) Balanced-Budget Rules and Public Deficits: Evidence from the U.S. States. Carnegie-Rochester Conference Series on Public Policy, 45: 13–76.Google Scholar
Bulow, J. I. (1982) What are corporate pension liabilities? Quarterly Journal of Economics, 97(3): 435–452.Google Scholar
Carmichael, J. and Palacios, R. (2003) A Framework for Public Pension Fund Management. Washington, DC: World Bank.Google Scholar
Chaney, B. A., Copley, P. A. and Stone, M. S. (2002) The effect of fiscal stress and balanced budget requirements on the funding and measurement of state pension obligations. Journal of Accounting and Public Policy, 21: 287–313.CrossRefGoogle Scholar
Coronado, Julia L., Engen, Eric M., and Knight, Brian (2003) Public Funds and Private Capital Markets: The Investment Practices and Performance of State and Local Pension Funds. National Tax Journal, 56(3): 579–594.Google Scholar
Davis, E. P., Grob, S. and de Haan, L. (2007) Pension Fund Finance and Sponsoring Companies: Empirical Evidence on Theoretical Hypotheses. Working Paper No. 158. Amsterdam, Netherlands: de Nederlandsche Bank.Google Scholar
Governmental Accounting Standards Board (1986) Statement No. 5: Disclosure of Pension Information by Public Employee Retirement Systems and State and Local Governmental Employers.Google Scholar
Governmental Accounting Standards Board (1994 a) Statement No. 25: Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans.Google Scholar
Governmental Accounting Standards Board (1994 b) Statement No. 27: Accounting for Pensions by State and Local Government Employees.Google Scholar
Governmental Accounting Standards Board (2010) Preliminary Views of the Governmental Accounting Standards Board: Plain-Language Supplement – Pension Accounting and Financial Reporting by Employers.Google Scholar
Harper, J. (2008) Board of Trustee Composition and Investment Performance of U.S. Public Pension Plans, Working Paper. Toronto: Rotman International Centre for Pension Management.Google Scholar
Hess, D. (2005) Protecting and Politicizing Public Pension Fund Assets: Empirical Evidence on the Effects of Governance Structures and Practices, UC Davis Law Review.Google Scholar
Johnson, R. W. (1997) Pension underfunding and liberal retirement benefits of state and local government workers. National Tax Journal, 50(1): 113–142.CrossRefGoogle Scholar
Mitchell, O. S. and Hsin, P. L. (1997) Public sector pension governance and performance. In Prieto, S. V. (ed.), The Economics of Pensions: Principles, Policies and International Experience. Cambridge: Cambridge University Press, pp. 92–126.Google Scholar
Munnell, A. H., Aubry, J. P. and Quinby, L. (2010 a) The Funding of State and Local Pensions: 2009–2013, State and Local Plans Issue in Brief 10. Chestnut Hill, MA: Center for Retirement Research at Boston College.Google Scholar
Munnell, A. H., Aubry, J. P. and Quinby, L. (2010 b) The Impact of Public Pensions on State and Local Budgets, State and Local Plans Issue in Brief 13. Chestnut Hill, MA: Center for Retirement Research at Boston College.Google Scholar
Munnell, A. H., Haverstick, K. and Aubry, J. P. (2008 a) Why Does Funding Status Vary Among State and Local Plans? State and Local Plans Issue in Brief 6. Chestnut Hill, MA: Center for Retirement Research at Boston College.Google Scholar
Munnell, A. H., Haverstick, K., Aubry, J. P. and Golub-Sass, A. (2008 b) Why Don't Some States and Localities Pay Their Required Pension Contributions? State and Local Plans Issue in Brief 7. Chestnut Hill, MA: Center for Retirement Research at Boston College.Google Scholar
Munnell, A. H., Kopcke, R. W., Aubry, J. P. and Quinby, L. (2010 c) Valuing Liabilities in State and Local Plans, State and Local Plans Issue in Brief 11. Chestnut Hill, MA: Center for Retirement Research at Boston College.Google Scholar
Munnell, A. H. and Sundén, A. (2001) Investment practices of state and local pension funds: implications for social security reform. In Mitchell, O. S. and Hustead, E. C. (eds.), Pensions in the Public Sector. Philadelphia, PA: Pension Research Council and University of Pennsylvania Press, pp. 153–194.Google Scholar
National Conference on Public Employee Retirement Systems (NCPERS) (2010) State Protections for Retirement Benefits. Available online at http://www.ncpers.org/ResourceCenter/Overview.aspGoogle Scholar
Novy-Marx, R. and Rauh, J. D. (2009) Public Pension Promises: How Big are they and What are they Worth? Working Paper. Evanston, IL: Northwestern University, Kellogg School of Management. Available online at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1352608Google Scholar
Public Plans Database (2001–2009). Center for Retirement Research at Boston College and Center for State and Local Government Excellence.Google Scholar
Rauh, J. and Novy-Marx, R. (2010) Policy options for state pension systems and their impact on plan liabilities. Journal of Pension Economics and Finance, 10(2): 173–194.Google Scholar
Rauh, J. D. (2009) Are State Public Pensions Sustainable? Paper prepared for Train Wreck: A Conference on America's Looming Fiscal Crisis, sponsored by the Urban-Brookings Tax Policy Center and the USC-Caltech Center for the Study of Law and Politics (15 January 2010).Google Scholar
Romano, R. (1993) Public Pension Fund Activism in Corporate Governance Reconsidered. Columbia Law Review, 93(4): 795–853.Google Scholar
Schneider, M. and Damanpour, F. (2002) Public choice economics and public pension plan funding: an empirical test. Administration and Society, 34(1): 57–86.Google Scholar
Steffen, K. (2001) State employee pension plans. In Mitchell, O. S. and Hustead, E. C. (eds.), Pensions in the Public Sector. Philadelphia, PA: Pension Research Council, pp. 41–65.Google Scholar
U.S. Board of Governors of the Federal Reserve System (1982–2009) Flow of Funds Accounts of the United States, Washington, DC.Google Scholar
U.S. Census Bureau (1957–2006) Employee-Retirement Systems of State and Local Governments, Washington, DC.Google Scholar
U.S. Congress, House Committee on Education and Labor (1978) Pension Task Force Report on Public Employee Retirement Systems. Washington, DC: U.S. Government Printing Office, p. 4.Google Scholar
U.S. General Accounting Office. 1985. Budget Issues: State Balanced Budget Practices. Washington, DC: U.S. Government Printing Office.Google Scholar
U.S. General Accounting Office (1993) Balanced Budget Requirements: State Experiences and Implications for the Federal Government. Washington, DC: U.S. Government Printing Office.Google Scholar
U.S Government Accountability Office. 2008. State and Local Government Retiree Benefits: Current Funded Status of Pension and Health Benefits. Washington, DC: U.S. Government Printing Office.Google Scholar
Weller, C. E., Price, M. A. and Margolis, D. M. (2006) Rewarding Hard Work: Give Pennsylvania Families a Shot at Middle Class Retirement Benefits. Washington, DC: Center for American Progress.Google Scholar
Yang, T. S. and Mitchell, O. S. (2005) Public Pension Governance, Funding, and Performance: A Longitudinal Appraisal, Working Paper PRC WP 2005-2. Philadelphia, PA: The Pension Research Council.Google Scholar
Zorn, P. (1994–2000) Survey of State and Local Government Retirement Systems: Survey Report for Members of the Public Pension Coordinating Council. Chicago, IL: Government Finance Officers Association.Google Scholar