Industry News

On March 2019, the National Association of State Retirement Administrators (NASRA) updated its standing issue brief, State and Local Government Spending on Public Employee Retirement Systems.  The brief examines the cost of pension benefits for state and local governments and finds that, based on U.S. Census Bureau data, about 4.7% of all state and local government direct general spending (which includes all government expenditures except intergovernmental transfers) was used to fund pension benefits in 2016.

Moreover, state and local government direct general spending on public pensions has remained relatively stable over the past 30 years, declining from 4.4% in fiscal year (FY) 1988 to about 2.3% in FY 2002 and rising to 4.7% by FY 2016.  In aggregate, state and local governments contributed $145 billion to pension funds in FY 2017, which is projected to be about 4.7% of projected state and local government direct general spending.

The brief also finds that across state and local governments in 2016, spending on pensions varied from 1.86% of total spending to nearly 10.0%.  This variation was mainly due to: 1) differences in benefit levels; 2) differences in the magnitude of unfunded pension liabilities; 3) level of commitment by plan sponsors to make required pension contributions; and 4) portion of the state’s population that lives in an urban area.  As a percentage of total spending, pension costs were about 31% higher for cities than for state governments over the 30-year period from 1987-2016.  This is primarily attributable to a larger portion of local government spending on salaries and related benefits compared to state government spending.

In addition, the brief clarifies that state and local government pension benefits are paid from the plan’s trust funds rather than from general operating revenues.  Public pensions are financed from the combination of employee contributions, employer contributions and investment returns.  Since 1988, investment earnings amounted to about 62% of all public pension plan revenues, with an additional 26% from employer contributions, and 12% from employee contributions.

Public retirement programs remain a relatively small, but growing part of state and local government spending.  The brief concludes, “Pension costs paid by state and local government employers vary widely and reflect multiple factors, including differing levels of public services, benefits, pension funding, and employer effort to pay required contributions, among other things.”

The brief also includes a table showing state and local government pension contributions in 2016 as a percentage of state and local government direct general spending on a state-by-state basis.

The brief is available here.