How to Measure Pension Fiscal Health in Your City

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The state of retirement funding has become an obvious fiscal concern for city governments, especially since the Great Recession.

In fact, a recent National League of Cities survey revealed the cost of employee/retiree pensions ranks third (following infrastructure needs and public safety needs) among the most negative factors impacting city budgets. Perhaps more telling is the approximately 81 percent that indicated pension costs increased in the last year.

Meanwhile, many city officials have been making changes, including lowering their investment-return assumptions and increasing contributions by governments and employees, in response to lower expected returns (particularly those on fixed income investments such as bonds) resulting from the Great Recession.

But more conservative investment-return assumptions lead to higher pensions costs, since larger contributions will have to be made to offset reduced investment earnings.

Coupled with that, it is recommended that pension plans have a strategy in place to attain a funded status of 100 percent or greater over a reasonable amount of time in order to secure participant benefits and build up a cushion to offset future adverse market conditions.

This poses a conundrum for city leaders trying to figure out how to ensure the viability of their pension plans. Ultimately, moving to long-term sustainability requires knowing how to assess and monitor all aspects of plan fiscal health.

Today, we’re introducing How to Measure Pension Fiscal Health, our newest municipal action guide.

This Municipal Action Guide equips city leaders with an understanding of their city’s pension plan data so they can become more effective public sector retirement leaders. Specifically, it assesses the utility and limitations of common fiscal metrics of plan health including unfunded pension liabilities, funded ratio, actuarially determined contributions and net amortization.

As these pension challenges have become more apparent, local elected officials have gained increased expectation to ensure the health and viability of their pension plans. As a result, city leaders must be equipped with meaningful data about their city’s plans. Even more important is understanding what the data is telling them about plan fiscal health.

City leaders should familiarize themselves with these changes and take a closer look at their pension data. And while one metric may be saying one thing, and another metric a slightly different thing, ultimately, city leaders may need to use all fiscal metrics in reckoning whether their pension plans are generally healthy.

About the Author: Anita Yadavalli is program director for city fiscal policy in NLC’s Center for City Solutions.