NASBO Releases 2016 Fiscal Survey of States
On December 13, 2016, the National Association of State Budget Officers (NASBO) released their semi-annual report, Fiscal Survey of States, Fall 2016. The report updates information on the states’ fiscal conditions, including aggregate and individual state data on general fund receipts, expenditures, and balances. The survey was conducted by NASBO and completed by state budget officers in all 50 states over the period from August 2016 through October 2016.
According to the report, after several years of relatively weak economic activity, the states’ fiscal conditions are expected to show a moderate improvement in fiscal 2017. The fiscal conditions continue to vary significantly among states. Progress after the Great Recession has been uneven and many are experiencing declining state tax collections.
Although many states are working to increase their rainy day funds for the next recession, other states are utilizing their reserves due to declining revenues. The variation among states is the result of numerous factors including: 1) differing tax and spending policies; 2) regional economic disparities; 3) negative impact of declining oil and gas prices on energy-producing states; and 4) changes in population and other demographics.
Total general fund revenues were estimated to increase by 2.5% in fiscal 2016. However, general fund revenue growth declined to 1.8% in fiscal 2016 with two states having revenue collections below budget forecasts. In fiscal 2017, general fund revenues are projected to increase by 3.6% to $809 billion, up from $781 billion in fiscal 2016.
In addition, enacted state budgets for fiscal 2017 show general fund expenditures increasing 4.3% to $820 billion, up from $786 billion in fiscal year 2016. The NASBO report indicates that increases in state general fund spending for fiscal 2017 totaling $26 billion will be directed mainly to K-12 education and Medicaid. Enacted 2017 budgets also indicate aggregate spending increases in all areas of state budgets, including higher education, corrections, transportation and public assistance.
The survey also reported on “total balances” which include year-end balances and any budget stabilization funds that the states have set aside for use in a financial downturn. In fiscal 2016, total balances decreased to $73.3 billion or 9.6% of general fund expenditures. In fiscal 2017, total balances are expected to decrease with 31 states projecting lower total balance levels based on their enacted budgets.
Most state balances in rainy day funds have been improving. In fiscal 2016, 29 states increased their rainy day fund balances and 25 states project increases in fiscal 2017. The median state’s rainy day fund balance was 5.1% of general fund expenditures in fiscal 2016 as compared to the prerecession peak median level in fiscal 2008 of 4.9%.
In addition, the report found that 20 states enacted tax cuts and 11 states enacted tax increases in fiscal 2017, resulting in net tax increases for the states of $1.3 billion. States with the largest increases in taxes and fees were Louisiana, California, Pennsylvania and Michigan. The largest enacted cuts were in Ohio.
Although there are measurable improvements in state budgets, state revenue growth is expected to remain limited. Many states may continue to face tighter financial conditions in fiscal 2018 and fiscal 2019 due to slower revenue collections. The report states, “In this environment, states are likely to be cautious in their spending and revenue forecasts, as they continue to focus on ensuring structurally balanced budgets.”
The full report and summary are available here.
Federal Reserve Reports Public Pension Assets Increased to $3.82 Trillion in the Third Quarter of 2016
On December 8, 2016, the Board of Governors of the Federal Reserve released its Financial Accounts of the United States statistical report for the third quarter of 2016. On page 99, the report shows that state and local government employee retirement fund assets totaled a record $3.82 trillion on September 30, 2016, up from $3.55 trillion on September 30, 2015, an increase of $267 billion (or 7.5% based on the unrounded asset values). Moreover, state and local retirement funds’ holdings of corporate equities totaled $2.26 trillion (59.2% of total assets) on September 30, 2016, up from $2.06 trillion (58.0% of total assets) on September 30, 2015.
The Federal Reserve’s report is available here.
SLGE/TIAA Release Retirement Confidence Survey Report
On December 8, 2016, the Center for State and Local Government Excellence (SLGE) and TIAA Institute released their report, 2016 Retirement Confidence Survey of the State and Local Government Workforce. The report examines retirement planning and saving among full-time state and local government employees and their confidence in their retirement income prospects. The survey is an ongoing joint research project of the SLGE and the TIAA Institute.
Key findings include:
- One-third of public-sector employees have been with their current employer for less than 10 years and one-third have been with their employer for 20 years or longer. Two-thirds do not expect to leave their current employer anytime soon;
- In deciding whether to switch employers, respondents ranked job security, health insurance, retirement benefits, and salary as the most important job elements they would consider;
- The vast majority of state and local employees are covered by a primary defined benefit pension plan and about 20% of these employees reported plan changes over the past two years;
- 67% expect to receive retiree health care benefits; 25% of these workers reported changes to these benefits over the past two years and 35% expect more changes over the next two years;
- 44% are very confident that they will receive all of the benefits that they have earned in retirement;
- 20% are very confident about their retirement savings;
- 49% expected to work for pay after retiring;
- 48% are not confident that Medicare will continue to provide comparable benefits in the future;
- 18% are very confident and 56% are somewhat confident about their retirement income prospects;
- 53% are not confident that the Social Security system will continue to provide benefits of at least equal value to the benefits received by retirees today; and
- 40% received retirement planning advice from a professional financial advisor within the past three years, and 24% reported following all the investment advice they received this year.
According to the survey, in 2016, the median expected age of retirement of state and local government employees was age 65 with public safety officers expecting to retire earlier at age 60. The report surveyed more than 1,200 state and local government employees nationwide, including public educators, police officers and firefighters.
The report concludes, “Public sector employees are concerned about the status of their employment-based plans, as well as Social Security and Medicare, and even their personal saving and investing for retirement. As state and local governments continue to focus on pension and retiree healthcare reforms, public sector employees are likely to increase their focus on “reform” of their personal retirement planning and saving.”
The report is available here.
NIRS Reports on Effects of the Pension Protection Act on DB and DC Plans
In November 2016, the National Institute on Retirement Security (NIRS) released its issue brief, 10 Years After the Pension Protection Act: Effects on DB and DC Plans. The brief analyzes the trends in both defined benefit (DB) and defined contribution (DC) retirement plans. In addition, it assesses the effects that the Pension Protection Act of 2006 (PPA) may have had on these plans.
According to NIRS, the PPA was enacted in 2006 with two objectives related to DB pension plans: 1) to promote better funding of private sector DB pension plans; and 2) to help ensure the solvency of the Pension Benefit Guarantee Corporation (PBGC) – the independent government agency that insures private sector DB plans.
In addition, the PPA made several significant changes to DC plans. The law clarified the use of automatic enrollment in DC plans and created several safe harbors for employers. These changes were intended to encourage increased employee participation and to make it easier for employees to manage their individual retirement accounts.
NIRS reported that some unintended consequences have developed for DB plans. Ten years after the passage of the legislation, many employers are less willing to sponsor these plans and more employers have frozen existing plans. In addition, the research indicates that DC plans with automatic enrollment have experienced some increased participation. However, the overall participation remains low and the changes are not sufficient to ensure adequate retirement security for most workers.
The report concludes, “Since DB plans are still the best way to achieve retirement security, changes should be made to the PPA and pension funding rules to ensure plan sponsors more predictability and less volatility in their funding costs.” It added, “In contrast to the decline of pensions in the private sector, public retirement systems have continued to provide DB pensions for a significant majority of public employees. Because these plans have not been forced to adopt market-value funding parameters like those of the PPA, these systems overall have been able to weather the Great Recession without freezing or terminating their traditional pensions.”
The report is available here.
SLGE’s Article on Local Governments’ Shifting Demographics and Succession Planning
In December 2016, Elizabeth Kellar, President/CEO of the Center for State and Local Government Excellence (SLGE), was published in the Local Government Review. The article, “Why Local Governments Are Talking about Millennials,” discusses demographic shifts in the local government workforce and the importance of succession planning.
According to the article, the projections for the U.S. Working Population in 2020 include: 17% of workers will be ages 56-74; 27% will be ages 43-55; and 56% will be ages 18-42. Currently, the average age of a local government worker is age 45 as compared to age 42 in the private sector workforce. Notably, 25% of local government workers are age 55 or older.
As older workers reach retirement age, more jobs become available for younger workers. In local governments, there is greater competition for candidates that are well-educated, experienced and skilled. Due to the aging local government workforce and more competition for talent, succession planning is vital. However, only 27% of human resources managers in local governments are engaged in workforce succession planning.
Kellar concludes, “The dramatic shift in generations requires a disciplined approach to ensure that local governments have the talent they need to meet society’s needs. Government leaders need to examine their current demographics, talent gaps, and development needs and craft a succession plan that helps their organizations be better prepared for the changes ahead.”
The article is available here.
HHS Releases Report on the Impact of the Affordable Care Act
On December 13, 2016, the U.S. Department of Health and Human Services (HHS) released an extensive compilation of state-level data detailing the impact of the Affordable Care Act (ACA). According to the report, “The uninsured rate has fallen to the lowest level on record, and 20 million Americans have gained coverage thanks to the Affordable Care Act (ACA). But beyond those people who would otherwise be uninsured, millions of Americans with employer, Medicaid, Medicare, or individual market coverage have benefited from new protections as a result of the law.”
Some of the key highlights include:
- After the ACA was enacted, over 150 million Americans are covered through employer-sponsored health plans;
- Over 70 million Americans are covered by Medicaid or the Children’s Health Insurance Program (CHIP) including millions of children, seniors and other individuals with disabilities;
- Over 10 million Americans have coverage through the marketplace with improved individual market coverage as compared to before the ACA; and
- Currently, Medicare covers 55 million Americans and the ACA has helped to strengthen the Medicare Trust Fund by extending it for more than 10 years.
Further information is included in the press release here.