Cities 101 -- Pensions

Most state and local employee retirement systems have substantial assets to weather the economic crisis.  As of September 2015, there is currently $3.56 trillion already set aside in pension trusts for current and future retirees.

Public pensions are funded and paid out over decades; state / local government retirees do not draw down their pensions all at once.

State and local employee retirement systems do not seek federal financial assistance. One-size-fits-all federal regulation is neither needed nor warranted and would only inhibit recovery efforts at the state and local levels.  

Public Pension Liabilities, Debt Loads, and Retiree Health Benefits Are Issues With a Long-Term Time Horizon

More state and local governments enacted significant modifications to improve the long-term sustainability of their retirement plans in 2010 than in any other year in recent history. According to the NLC City Fiscal Conditions survey, about three-quarters of cities have made changes to retirement plan structures between 2009 and 2015.

While pension obligations are legally binding, often backed by explicit state constitutional or statutory guarantees, states are generally free to change any provision of their retiree health plans, including terminating them, because they do not carry the same legal protections. Therefore, it is misleading to combine unfunded pension liabilities with the unfunded retiree health benefits as an argument for impending pension meltdown.  

Long-Term Investment Returns of Public Funds Continue to Exceed Expectations

Over the last 25 years that saw three economic recessions and several years of negative median public fund investment returns actual public pension investment provided 8.4 percent median return.  The current median return assumption is 7.75 percent.

While public pensions have reduced assumed rates of return in recent years, they remain considerably higher than private sector pensions.  Although some actuaries have criticized these assumptions, it is important to remember that a government entity is not a “going concern” like a business.

Retirement Systems Remain a Small Portion of State and Local Government Budgets

The portion of state and local government spending dedicated to retirement system contributions is about four percent.  Pensions are a trust that public retirees and their employers contributed to while they were working.

While there are pension trusts that are fully funded with enough assets for current pension obligations, there are legitimate issues with underfunding because of the Great Recession and stock market declines. Pension funds have stabilized and began to recover from their lowest actuarial funding level in 2012.

Benefit and financing changes in public plans over the last few years have helped to minimize required increases. The vast majority of public employees are required to contribute a portion of their wages-typically, five to ten percent-to their state or local pension.  When asked about pension plan changes made in NLC’s City Fiscal Conditions survey, the most common response was an increase in employee contributions.  

Pension Dollars Help the Economy of Every Jurisdiction

Public employees live in every city and county in the nation. The vast majority retire in the same jurisdiction where they worked. The over $228.5 billion in annual benefit distributions from pension trusts for state and local employees are a critical source of economic stimulus to communities throughout the nation, and act as an economic stabilizer in difficult financial times. Recent studies have documented public retirement system pension distributions annually generate  $34.7 billion in federal tax revenue, more than $30 billion in annual state and local government tax revenue, and a total economic impact of more than $451 billion.      

Source

“City Fiscal Conditions: 2016” National League of Cities

“Pensionomics 2014: Measuring the Economic Impact of DB Pension Expenditures.” National Institute on Retirement Security

Public Plans Database (www.publicplansdata.org)

"State and Local Fiscal Facts: 2016". Joint fact sheet by NLC, NGA, NCSL, CSG, NACo, USCM, ICMA, NASBO, NASACT, GFOA, and NASRA.

Public Plans Database (www.publicplansdata.org)

 

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