Most state and local public retirement systems “currently have assets sufficient to cover their benefit commitments for a decade or more,” despite suffering significant investment losses from the recent economic downturn, according to a Government Accountability Office report released March 2.
But “even if these plans received no more contributions or investment returns, most large plans would not exhaust their assets for a decade or longer, since they hold assets at least 10 times their annual expenditures,” noted the report, “State and Local Government Pension Plans: Economic Downturn Spurs Efforts to Address Costs and Sustainability.”
Among other findings, the GAO report raised concerns about issuing pension obligation bonds to finance retirement plans.
“These transactions involve significant risks for government entities because investment returns on the bond proceeds can be volatile and lower than the interest rate on the bonds,” the report said. “In these cases, POBs can leave plan sponsors worse off than they were before, juggling debt service payments on the POBs in addition to their annual pension contributions. In a recent brief, the Center for State and Local Government Excellence reported that by mid-2009, most POBs issued since 1992 were a net drain on government revenues.”
Because of these concerns, Pennsylvania “enacted legislation in 2010 prohibiting the use of POBs,” the report said.
Also, the report found “most public plans have experienced a growing gap between actuarial assets and liabilities over the past decade, meaning that higher contributions from government sponsors are needed to maintain funds on an actuarially based path toward sustainability,” at the same time state and local governments face fiscal pressures.
To help strengthen their plan's funding, state and local sponsors have enacted benefit and other changes to their plans. Among the changes, “35 states have reduced pension benefits, mostly for future employees due to legal provisions protecting benefits for current employees and retirees,” the report said. “A few states, like Colorado, have reduced post-retirement benefit increases for all members and beneficiaries of their pension plans.”
“Half of the states have increased member contributions, thereby shifting a larger share of pension costs to employees,” the report said.
“Georgia, Michigan and Utah recently implemented hybrid approaches, which incorporate a defined contribution plan component, shifting some investment risk to employees,” the report said.
“(M)ost plans continued to receive pre-recession contribution levels on an actuarial basis from their sponsors, with most plans contributing their full actuarial level,” although “there were some notable exceptions, and these plans continued to receive lower contribution payments,” the report said.
Several factors have contributed to the growing gap between plans' actuarial assets and liabilities. For example, large pension funds generally assumed investment returns ranging from 6% to 9% throughout the 2000s, including assuming returns of about 8%, on average, in 2009, despite the declines in the stock market during this time.
“Positive investment returns are an important source of funds for pension plans, and have historically generated more than half of state and local pension fund increases,” the report said. “However, rather than adding to plans' assets, investments lost more than $672 billion during fiscal years 2008 and 2009, based upon Census Bureau figures for the sector. Since 2009, improvements in investment earnings have helped plans recover some of these losses.”
