GAO: Public Pensions Are in Better Shape than Most Think

March 12, 2012

by Neil Bomberg

A General Accountability Office (GAO) study of state and local government pension plans released on Friday, March 2, confirmed what the National League of Cities (NLC) and many other national groups representing employers and state and local pension plans have been saying for years:

Public pensions are not facing a short-term crisis. While they need to address expediently their long-term sustainability, most state and local government pension plans have sufficient assets to cover retirees for a decade or more.

City leaders from across the country have been and continue to be focused on the long-term sustainability of their pension plans. They have been making changes to their plans in order to ensure that current and future employees have defined benefit pensions that will carry them through their retirement years. And while there certainly are exceptions to the general rule that pensions are in good shape nationwide, NLC has long believed that America's cities and towns do not need Congress or the Administration to intrude. In fact, a more laissez-faire attitude on the part of Congress and the Administration would be helpful.

This GAO report confirms that.

So what specifically did the GAO report? It reported that there are over 3,400 state and local pension systems in the United States, that most are large state plans that cover state and local employees, but that because there are more local government employees than state government employees (14 million compared with 5 million), local governments generally retain responsibility for the employer's share of pension plan funding, substantially more local government funds go into pension plans each year, than do state government funds.

The GAO also found, that about 6.4 million, or over one-fourth of state and local government employees are not eligible to receive Social Security benefits based on their government earnings, and therefore do not pay Social Security taxes on earnings from their government jobs. As a result, employer-provided pension benefits for non-covered employees are generally higher than for employees covered by Social Security, and employee and employer contributions are higher as well.

But here is the most important finding: even though pension plans suffered significant investment losses during the recent recession, "most state and local government plans currently have assets sufficient to cover their benefit commitments for a decade or more," according to the GAO, and reports to the contrary have been totally misleading because they have made their assumptions based on the notion that employers and employees alike would stop making contributions.

Why are they in relatively good shape? Because, as the GAO found, since 2008, 35 states have made changes to their pension systems in order to make them fiscally more sustainable, including increasing member contributions, and switching to hybrid plans which incorporate a defined contribution plan component, thereby shifting some investment risk to employees.

So what does this tell us? It tells us that public pensions are generally in good shape, able to meet their obligations through 2022, and that most public pensions are making the kinds of changes they need to make in order to be sustainable long after 2022. It also tells us that statements to the effect of the imminent demise of public pension plans, or that the federal government will have to step in and rescue state and local public pension plans are totally bogus and have no basis in reality.

From where we sit at NLC, the news from the GAO is very good. It doesn't mean that cities and towns should sit back and ignore the ever increasing liabilities they face with regard to their pensions; it does not mean that reforms are not necessary; and it does not mean that contribution levels should not be increased. All of those things may be necessary over the next ten years. But it does mean that in general our elected officials can be thoughtful, methodical, and careful as they try to generate long-term solutions. And it also means that the doomsayers who predicted that public pensions were about to fail and that the federal government would have to step in with a multi-trillion dollar bailout can begin to focus on real issues that will matter to the future of this nation.