NASRA Updates Issue Brief on State and Local Government Spending on Public Employee Retirement Systems

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NASRA Updates Issue Brief on State and Local Government Spending on Public Employee Retirement Systems

On February 23, 2022, 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 5.0% of all state and local government direct general spending (which includes all government expenditures except intergovernmental transfers) was used to fund pension benefits in Fiscal Year (FY) 2019.  

Furthermore, state and local government direct general spending on public pensions has remained relatively stable over the past 30 years, declining from 3.7% in FY 1991 to about 2.3% in FY 2002 and rising to 5.2% in FY 2018 before decreasing to 5.0% in FY 19. In aggregate, state and local governments contributed $180 billion to pension funds in FY 2020, which represents an increase of 7.4% from FY 2019. This change is projected to be about 5.2% of projected state and local government direct general spending.

The brief also finds that across state and local governments in 2019, 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 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 1991, investment earnings amounted to about 60% of all public pension plan revenues, with an additional 28% from employer contributions, and 12% from employee contributions.  

The brief also includes a table showing state and local government pension contributions in 2019 as a percentage of state and local government direct general spending on a state-by-state basis.

The brief is available here.

CRS Updates Report on Social Security’s Windfall Elimination Provision (WEP) and Government Pension Offset (GPO)

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CRS Updates Report on Social Security’s Windfall Elimination Provision (WEP) and Government Pension Offset (GPO)

On February 22, 2022, the Congressional Research Service (CRS) published its updated report, Social Security: The Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). The report provides an overview of the WEP and the GPO, which are two separate provisions that reduce regular Social Security benefits for workers and their eligible family members if the worker receives (or is entitled to) a pension based on earnings from employment not covered by Social Security.

The WEP affects Social Security benefits paid to individuals who earn Social Security benefits from Social Security covered employment, but who also earn pension benefits from state or local government employment not covered by Social Security.  In these cases, Social Security benefits are lowered by the WEP.

Social Security benefits are designed to replace a larger percent of pre-retirement income for lower-paid workers than for higher-paid workers. This is done by: 1) calculating an employee’s average indexed monthly earnings (AIME) from employment covered by Social Security; and 2) calculating the employee’s primary insurance amount (PIA) using a formula that applies a higher replacement percentage to lower earnings than to higher earnings. In 2022, the PIA formula is:

  • 90% for the first $1,024 of AIME, plus
  • 32% of AIME over $1,024 and through $6,172, plus
  • 15% of AIME over $6,172.

Before the WEP was established, for those who split their careers between covered and non-covered Social Security employment, the PIA formula resulted in a higher proportion of covered earnings being subject to the 90% rate. This resulted in what some perceived as a “windfall.” In 1983, Congress passed the WEP to eliminate this perceived advantage by lowering the 90% rate to 40% for those subject to the WEP. As of December 2021, Social Security Administration data indicated that about 2.0 million individuals (or about 3% of all Social Security beneficiaries) were affected by the WEP, with about 1.9 million of those being retired-worker beneficiaries (or about 4% of the entire retired-worker beneficiary population).

Under the GPO, an individual’s Social Security spousal or survivor’s benefit is reduced (“offset”) by two-thirds of the pension benefits received from federal, state, or local government employment that is not covered by Social Security. According to the report, about 724,000 Social Security beneficiaries (or about 1% of all beneficiaries) had spousal or survivor benefits reduced by the GPO as of December 2021. Of those, 52% were spouses and 48% were widows and widowers, with about 71% of all GPO-affected beneficiaries had their benefits fully offset and about 29% had their benefits partially offset. 

The report is available here.

MissionSquare Publishes Public Plans Database Report

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MissionSquare Publishes Public Plans Database Report

On February 17, 2022, the MissionSquare Research Institute (formerly the Center for State and Local Government Excellence at ICMA-RC or SLGE) published its report, Public Plans Database – Snapshot as of December 2021. According to the Institute’s latest Public Plans Database (PPD) analysis, the funded status of state and local pension plans reached 75.4% in 2021, up from 72.2% in 2020. Since 2020, the funded status has increased during a period of strong investment returns and most state and local governments are contributing nearly all or more than the full Actuarially Determined Employer Contribution (ADEC).

Other key findings include: 

  • According to the data available in 2021, plans have averaged contributions between 97% and 106% of the ADEC. As compared with 2010, plans in the top quintile by funded ratio contributed 99% of the ADEC, while those in the bottom quintile contributed only 78%.  
  • Since 2005, the portion of pension fund investments has changed significantly for public plans with 29% of total portfolios invested in real estate, hedge funds, commodities, and alternative investments in 2020, up from 9% in 2001. 
  • Among all sizes of public plans, the ratio of active workers to plan beneficiaries continues to decline, which may be due to the ongoing retirement of members of the baby boom generation and the departure of other employees during the Great Resignation. 

The report is available here.

NCPERS Releases 2021 Public Retirement Systems Study

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NCPERS Releases 2021 Public Retirement Systems Study

On February 2, 2022, the National Conference of Public Employee Retirement Systems (NCPERS) released the results of its 2021 NCPERS Public Retirement Systems Study. The annual comprehensive survey provides information on investment experience, actuarial assumptions, plan administration and operations, trends, innovations and best practices. 

The key findings include: 

  • Due to the COVID-19 pandemic, about 78% of pension systems offered live webinars to members in 2021 up from 54% in 2020.
  • During 2021, the average funding levels (the value of the assets in the pension plan divided by an actuarial measure of the pension obligation) rose slightly. Average funding levels increased to 72.3% in 2021 from 71.7% in 2020. 
  • Of the reporting pension systems, investment returns were the most significant source of revenue at 68% of overall pension revenues while employer contributions totaled 23% and employee contributions totaled 8%.
  • In 2021, the average investment return assumption was 7.07% compared to 7.26% in 2020. The majority of responding funds reported that they have reduced their actuarial assumed rate of return or are considering doing so in the future.  
  • The inflation assumption remained steady at 2.7%. These assumptions were in place during the acceleration in the rate of inflation that increased to 7% at the end of 2021, up from 1.4% in 2020 (as reported by the Bureau of Labor Statistics).
  • Overall, the reporting funds experienced solid returns. On average, 20-year returns were 6.7%, 10-year returns were 8.4%, 5-year returns were 8.7%, and 1-year returns were 14.0%. 
  • Of those reporting funds that offered a cost-of-living adjustment (COLA) for members, the average was 1.7% in 2021. However, many of the reporting funds did not offer a COLA in 2021.
  • Pension funds decreased the cost of administering funds and paying investment managers to 54 basis points (or 54 cents per $100 invested) versus 60 basis points in 2020. This is comparable to the average fee of 59 basis points for hybrid funds.  

The survey included 156 state and local government pension funds with more than 17.7 million active and retired members and total assets exceeding $2.6 trillion in actuarial and market value.  Of the pension funds surveyed, 53% were local government funds and 47% were state pension funds. 

The report is available here.

S&P Global Releases Report on Considerations for Public Pension and OPEB Credit

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S&P Global Releases Report on Considerations for Public Pension and OPEB Credit

On February 1, 2022, S&P Global released its report, Five Public Pension and OPEB Credit Considerations to Watch in 2022. According to S&P, “public pension system funded ratios generally improved in fiscal 2021, often significantly, with market returns of near 30%, but S&P Global Ratings notes that large unfunded pension liabilities remain a significant pressure point for states and local governments around the country.”

The key highlights include:

  • In the U.S. public finance sector, pension funding improved after very strong market returns in 2021; however, a decrease in contributions may affect some of the progress.
  • Over the long term, high inflation may impact pensions, but is unlikely to result in significant short-term changes to liabilities or costs.
  • If bond rates remain low, pension obligation bonds (POBs) will likely continue to increase; however, anticipated rate increases could interrupt issuance plans.
  • Due to the COVID-19 pandemic, demographic impacts may continue for some time; however, there may be limited pension funding relief despite increased mortality from COVID-19.
  • Environmental, social, and governance (ESG) considerations will continue to influence pension management, including contribution and benefit reforms.

The report is available here.

MissionSquare Publishes Issue Brief on State and Local Government Employee Benefits

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MissionSquare Publishes Issue Brief on State and Local Government Employee Benefits

On February 1, 2022, the MissionSquare Research Institute (formerly the Center for State and Local Government Excellence at ICMA-RC or SLGE) published its issue brief, Benefits of State and Local Government Employees. The brief provided an overview of employee benefits provided to state and local government employees. The research findings indicate that those benefits can help to attract and retain workers as the nation faces unprecedented labor shortages.

According to the Institute, as of March 2021, “there were approximately 18.5 million state and local government employees, across all 50 U.S. states, approximately 39,000 general-purpose local governments, and 51,000 special districts, filling positions in education, utilities, transportation, hospitals, and general administration, among other key responsibilities.”

The findings include:

  • 86% of state and local employees have access to a Defined Benefit (DB) pension plan, with 75% participating in the plan.
  • Of those with a pension plan, over 90% have required employee contributions at an average of 7.2% of annual earnings.
  • 38% have access to a Defined Contribution (DC) plan with 18% participating.
  • 89% have access to health care benefits (i.e., medical, dental, vision and prescription drug coverage) with 78% participating.
  • 83% have access to life insurance and 30% have access to long-term care insurance.
  • 27% have access to short-term disability benefits and 39% have access to long-term disability benefits.
  • Overall, the majority of state and local employees have access to leave benefits, except for paid family leave. For state employees, 25% have access to paid family leave while 98% have access to unpaid family leave. For local employees, 27% have access to paid family leave while 93% have access to unpaid family leave.

The research is based primarily on data from the U.S. Bureau of Labor Statistics’ National Compensation Survey (March 2021), among other national data sources.

The report is available here.

Actuarial Standards Board Approves Revisions to ASOP No. 4

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Actuarial Standards Board Approves Revisions to ASOP No. 4

Recently, the Actuarial Standards Board (ASB) approved a revised version of Actuarial Standard of Practice (ASOP) No. 4, Measuring Pension Obligations and Determining Pension Plan Costs or Contributions. The ASB provides standards and guidance for a broad range of actuarial practices through a series of ASOPs, including those related to pension and retiree group benefit obligations. 

ASOP No. 4 provides guidance to actuaries when performing actuarial services with respect to measuring obligations under a defined benefit pension plan and determining periodic costs or actuarially determined contributions for such plans. The ASOP revisions to the version adopted in December 2013 expand the scope to clarify the application of the standard when the actuary selects an output smoothing method and when an assumption or method is not selected by the actuary. The revisions include a number of technical items relating to funding calculations and related disclosures.

In addition, a requirement was added to calculate and disclose a reasonable actuarially determined contribution and “Low-Default-Risk Obligation Measure” (LDROM), which is the value of liabilities using an interest rate derived from low-default-risk fixed income securities. The LDROM was added to provide guidance regarding the calculation of this measure when the actuary is performing a pension plan actuarial valuation.

The revised standard is effective for any actuarial report issued on or after February 15, 2023; and if the measurement date in the actuarial report is on or after February 15, 2023. 

An overview of the changes and full ASOP No. 4 are available here.