States' unfunded pension obligations to their current and retired employees have exploded in recent years to levels that are estimated to be between $750 billion and $4.4 trillion, reports the Federal Reserve Bank of Cleveland. In theory, this massive debt should have implications for states’ ability to meet their financial obligations and a measurable impact on funding costs. Yet, it finds no evidence that municipal bond markets are pricing the risks to states’ fiscal health arising from these large obligations.
The gap between the promises states have made for public employees’ retirement benefits and the money they have set aside to pay these bills was at least $1.38 trillion in fiscal year 2010, according to Pew's latest comprehensive analysis on pension and retiree health care funding.
This brief takes a look at how the accounting changes will alter the funded ratios of state and local plans:
The report concludes that employers and plan administrators should be prepared for funded ratios reported in their financial statements to decline sharply under the new rules.
The question of comparability of compensation in the state-local and private sectors was the focus of a recent Issue in Brief. The conclusion was that wages for workers with similar characteristics, education, and experience were higher in the private sector than the public, but benefits for state-local workers roughly offset the wage penalty.
A widespread perception is that state-local government workers receive high pension benefits which, combined with Social Security, provide more than adequate retirement income. This brief summarizes the results of a paper that uses the Health and Retirement Study (HRS) and actuarial reports published by state and local pension systems to test the hypothesis that state-local workers have more than enough money for retirement.
This brief identifies the impact of public sector unions and other factors on benefit levels, wages, and employment.
The financial crisis and ensuing recession have had an enormous impact on state-administered pension plans. Less is known about how locally-administered plans have fared in the last four years. This brief attempts to fill that gap.
The Pew Center on the States, provides an interactive map to see state-specific data, and reports:
Legislation called “Public Employee Pension Transparency Act” (H.R. 567), introduced in Congress and referred to the House Committee on Ways and Means, and identical bill S.347 introduced in the Senate, would amend the Internal Revenue Code of 1986 to deny specified federal tax benefits relating to specified bonds issued by a state or political subdivision during any period in which such state or political subdivision is non-compliant with specified reporting requirements for state or local government employee pension benefit plans. The reporting requirements are twofold – an annual report and supplementary report which is only required if certain conditions are not met by the reporting entity. The legislation would also require the Secretary of the Treasury to develop model reporting statements and create and maintain a public website, with searchable capabilities, for purposes of posting plan information required by this Act...
In the private sector, numerous studies have shown that pension underfunding affects corporate bond ratings. And Moody’s just announced that it would combine unfunded pension liabilities with outstanding bonds when evaluating a state’s leverage position. These developments raise the question of how future pension commitments affect today’s borrowing costs in the public sector.
The Center on Budget and Policy Priorities released a report in January, “Misunderstandings Regarding State Debt, Pensions, and Retiree Health Costs Create Unnecessary Alarm/Misconceptions Also Divert Attention from Needed Structural Reforms.” The report clarifies that current fiscal problems in the state and local government sector are not tied to longer-term issues related to debt, pension obligation, and retiree health costs.
State Pension Reform (10/11/2010)
States and local governments have needed to provide for their employees’ retirements since 1935, when they were excluded from social security. Despite the track record for public pensions — 9.25% per year over the last 25 years, according to the National Institute on Retirement Security — many plans have sustained severe investment losses during the recent recession. Many states have enacted significant retirement legislation in 2010 to meet their obligations. States have taken many common steps as wells as a few unique concepts to address their unfunded pension liabilities. The chart shows steps various states have taken to address their unfunded pension liabilities...
Despite recent media reports to the contrary, the public pension system is not woefully underfunded and headed for disaster. In this report, the National Association of State Retirement Administrators (NASRA) critiques the research behind the spate of doomsday predictions.
The State of New Jersey consented to the Order Instituting Cease-and-Desist Proceedings instituted by the Securities and Exchange Commission. The SEC found that New Jersey violated Sections 17(a)(2) and 17(a)(3)of the Securities Act in connection with the offer and sale of over $29 billion in municipal bonds from August 2001 through April 2007...
Bloomberg reported that the State of New York will be decreasing its assumed rate of return on its investments from 8% to either 7.5%-7.75%. The fund reportedly has assets of about 107 percent of its future liabilities.
Bloomberg reports that, according to an academic study by Joshua D. Rauh, associate professor of finance at Northwestern University’s Kellogg School of Management in Evanston, Illinois, eliminating cost-of-living increases and raising the retirement age for public employee retirees will not cover the estimated $3 trillion obligation.
Rauh estimates that if all states raised the retirement age to 74, “the unfunded liability for promises already made would still be more than $1 trillion.” He presented the paper on Thursday to the National Bureau of Economic Research’s State and Local Pensions conference in Jackson Hole, Wyoming...
State and local governments are currently grappling with a myriad of budgetary and fiscal problems. Concerns over the growing costs of funding their long-term financial commitments to public employees have taken center stage. Government promises at all levels to fund retirement costs have become a huge issue today, especially since the Great Recession has decimated government finances and taxpayers’ ability to support them.
With the implementation of relatively new accounting rules for public employee retirement benefits, municipal bond investors have a new tool to assist them in evaluating state and local government credit. The un-funded pension and retiree benefit liabilities of municipal issuers represent real threats to their future fiscal health.
This article will focus on other post employment benefits or OPEBS, recent efforts to quantify and account for them and what effects these changes are having on government behaviors...
Larry Levitz is a contributor to Muni Market Update. The opinions expressed are his own.