Industry News

On December 4, 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 2017.  

Furthermore, state and local government direct general spending on public pensions has remained relatively stable over the past 30 years, declining from 4.1% in Fiscal Year (FY) 1989 to about 2.3% in FY 2002 and rising to 4.7% in FY 2017.  In aggregate, state and local governments contributed $160 billion to pension funds in FY 2018, which is projected to be about 5.0% of projected state and local government direct general spending.

The brief also finds that across state and local governments in 2017, spending on pensions varied from less than 2.0% 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; 4) portion of the state’s population that lives in an urban area; and 5) fiscal condition of government plan sponsors.  As a percentage of total spending, pension costs were about 31% higher for cities than for state governments over the 30-year period from 1988-2017.  This is primarily attributable to the types of services delivered at the local level which results in a larger portion of local government spending on salaries and related benefits compared to state government spending. 

In addition, the brief clarifies that public pensions are financed from the combination of employee contributions, employer contributions and investment returns.  Since 1989, investment earnings amounted to about 63% of all public pension plan revenues, with an additional 26% from employer contributions, and 11% from employee contributions.  

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 levels, employer effort to pay required contributions, and the fiscal condition of states and their political subdivisions, among others.”   

The brief also includes a table showing state and local government pension contributions in 2017 as a percentage of state and local government direct general spending on a state-by-state basis.

The brief is available here.