U.S. public pension plans could potentially improve funded status by employing a tool called sustainability valuation to monitor their fiscal status, according to a new study released Tuesday by the National Conference on Public Employee Retirement Systems.
In the study, NCPERS explores the theoretical concept in economic literature that if the ratio between debt and economy is stable, then the debt is sustainable. The study then applies that theory to examine whether the ratio between unfunded liabilities and the economy is stable.
The result, according to the study, is that the total funded liabilities of all state and local pension plans in the U.S. could have been stabilized — meaning plans could provide benefits without interruption in perpetuity — by contributing a total of $141 billion, or about 3% of the total unfunded liabilities in 2018, the most recent year with complete data available.
Hank Kim, NCPERS' executive director and counsel, said in a phone interview the purpose of the study was to give some context given how often the health of public pension plans can become the focus of political controversies.
"It just seems to be one of those things that riles people up, and when you take pension plans in context to the overall capacity of states or localities, while $5 trillion in assets under management and the corresponding unfunded status is in the aggregate a little daunting," Mr. Kim said, "we felt there was a lack of context."
"States and localities have a wealth of resources and compared to that wealth of resources, the liabilities of pension plans are not that daunting," he said.
Michael Kahn, NCPERS' director of research and author of the study, said in a news release that he believes his analysis shows that public pension plan critics make a fundamental error in analyzing the health of plans by comparing pension liabilities that are amortized over 30 years with state and local economic capacity or revenues over a period of just one year.
"For years, opponents of public pensions have been locked in an extraordinary game of one-upmanship to come up with the most shocking unfunded liabilities number," Mr. Kahn said. "The real number to watch is the amount of money needed to make and keep a pension plan fiscally sustainable. The more sustainable pension plans are, the better funded they are. Similarly, the sustainable pension plans have lower contribution rates."
Mr. Kim said in his interview that the total personal income of people in any given state was determined to be the best indicator of a state's capacity to absorb debt.
For example, in California, the study says state and local outstanding debt is sustainable because personal income has been rising faster than debt since 2010, except for a slight increase in debt in 2017 and 2018. The study then calculates the sustainability of unfunded pension liabilities by using the ratio between 30-year unfunded liabilities and 30-year personal income in the state. For California, the total the study found the state needed to contribute was $30.2 billion, or 1.2% of the state's personal income.
The relatively modest amount stands in stark contrast to the total unfunded liabilities reported by the state's and the country's two largest public pension plans.
According to most recent available data, as of June 30, 2019, the $500 billion California Public Employees' Retirement System, Sacramento, and the $321.9 billion California State Teachers' Retirement System, West Sacramento, had unfunded liabilities of $158.3 billion and $105.7 billion, respectively.
"Our hope is that there are a number of tools that pension plans currently use to make themselves sustainable, fiscally responsible, etc., this study and the sustainability valuation as we state throughout the report is not to supplant or replace any of them," Mr. Kim said. "What we are suggesting is this is another tool in the toolbox that plans and plan sponsors can use especially when they face acute economic crises."
The study is available on NCPERS' website.