CRR Releases Public Pension Investment Update

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CRR Releases Public Pension Investment Update

On November 22, 2022, the Center for Retirement Research at Boston College (CRR) released its issue brief, Public Pension Investment Update: Have Alternatives Helped or Hurt? CRR examined whether alternative investments (such as private equity, hedge funds, real estate and commodities) have been favorable or unfavorable over the long term. The brief assesses the impact of alternative investments on pension plans’ long-term investment performance, which includes investment losses in 2022 that expunged much of the gains from 2021.

The key findings include:

  • In fiscal year 2022, most state and local pension plans experienced negative asset returns, and some suggested that losses may have been much greater without alternative investments;
  • Over the time period from 2001 to 2022, the results suggest that alternatives have not benefited overall returns even though they may have reduced volatility;
  • State and local pension funds have increased their aggregate allocations to alternatives to 34% in 2022, up from 9% in 2001; and
  • In 2001, the distribution of alternative investments was 56% in real estate, 38% in private equity, 4% in hedge funds and 2% in commodities. In 2022, the distribution was 34% in real estate, 34% in private equity, 18% in hedge funds and 14% in commodities.

The brief concludes, “the investment performance of pension funds since 2001 has been below actuarial expectations and that plans’ increasing reliance on alternative investments has not helped – although it may have dampened volatility.”

The brief is available here.

Pensions & Investments Research Center Publishes Report on Public Pension Plan Benchmarks

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Pensions & Investments Research Center Publishes Report on Public Pension Plan Benchmarks

In November 2022, the Pensions & Investments (P&I) Research Center published its report, Public Pension Plan Benchmarks. The report covers the overall and asset class benchmarks selected by the 50 largest U.S. public defined benefit (DB) plans. P&I indicates that the top 50 plans are based on their reported U.S. defined benefit asset totals in their 2021 survey. The report focuses on U.S. equities, core fixed-income, private equity, real estate and hedge funds. However, it notes that 11 of the plans did not disclose sufficient detailed information and 10 plans had a fiscal year other than June 30th.

According to P&I, “Due to the complexity of public plan reporting and different approaches to subasset classes, asset allocation and performance ranges can be too broad for meaningful comparison, and thus comparing the asset allocation and benchmarking of different plans can be reductive with adequate context.” It adds that the “report aims to help investment professionals understand the complexity and potential opportunities in the U.S. public DB landscape so that they can select or even create fund choices that better match investment goals and mandates.”

The report is available here.

NASBO Releases 2022 State Expenditure Report

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NASBO Releases 2022 State Expenditure Report

On November 18, 2022, the National Association of State Budget Officers (NASBO) released its 2022 State Expenditure Report: Fiscal Years 2020-2022. This annual report examines spending in the various areas of state budgets including: elementary, secondary and higher education; public assistance; Medicaid; corrections; transportation; and other areas. It also includes data on capital spending and revenue sources in state general funds.  

According to the 2022 report, total state spending has been severely affected by a combination of federal COVID-19 pandemic aid and rising state tax collections over the past two years.

Some of the key findings include:

  • In fiscal year 2022, total state spending (including general funds, other state funds, bonds, and federal funds) is estimated to increase 7.3%, which is mainly driven by additional general fund spending;
  • General fund spending increased 18.1%, which is the highest rate over the past 36-year history of the State Expenditure Report. The increase is primarily due to states spending down surplus funds following two consecutive years of strong revenue growth;
  • Federal funds declined by 0.2% although their levels remained elevated. The decrease is largely due to the high baseline established in fiscal year 2021, declining federal fund spending from several heavily populated states, and reduced unemployment insurance benefit payments;
  • Spending from the states’ own funds (general funds and other state funds combined, excluding bonds) is estimated to increase 12.3%;
  • The “transportation” category is estimated to have the largest gain in total state spending at 19.5%; and
  • State general fund revenue experienced strong growth for two consecutive years. In fiscal year 2022, it is estimated to increase 15.9% while revenues increased 16.6% in fiscal year 2021.

The report is available here.

S&P Global Reports on the Meaning and Implications of ASOP No. 4 Revisions and the LDROM

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S&P Global Reports on the Meaning and Implications of ASOP No. 4 Revisions and the LDROM

On November 15, 2022, S&P Global Ratings released its pension brief, A Closer Look At A New Actuarial Liability Measure And What It Means for U.S. Public Finance Issuers. The brief discusses the revised version of Actuarial Standard of Practice (ASOP) No. 4, Measuring Pension Obligations and Determining Pension Plan Costs or Contributions recently approved by the Actuarial Standards Board (ASB).

Specifically, the brief addresses the meaning and implications of ASOP No. 4 and a new requirement that was added to calculate and disclose a reasonable actuarially determined contribution and “Low-Default-Risk Obligation Measure” (LDROM). The LDROM is the value of liabilities using an interest rate derived from low-default-risk fixed income securities. The new liability measure was added to provide guidance regarding the calculation of this measure when the actuary is performing a pension plan actuarial valuation. 

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. 

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.  

The brief indicates, “We foresee that the inclusion of LDROM could result in some confusion and potential misunderstanding, as it will have the lowest funded ratio, which is likely to generate discussion and could be misconstrued as a true measure of funded status. Although LDROM could be a valuable tool in risk and benefit security discussions, it does not represent a real-word expectation of future funding needs, so a ratio of assets to LDROM may be less of a “funded ratio” than a tool for risk analysis.”

The brief is available here.

Piotr Krekora Serves on FSFOA Speaker Panel

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11/16/2022

Piotr Krekora Serves on FSFOA Speaker Panel

Piotr Krekora will serve on a speaker panel at the Florida School Finance Association (FSFOA) November conference.  The session “OPEB Refresher” will summarize the nature and history of Other Post Employment Benefits.  The panel will discuss various reporting aspects of GASB Statement No. 75.

GRS Publishes Research Alert on Maximum Deferral and Threshold Limits for 2022 and 2023

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GRS Publishes Research Alert on the Maximum Deferral and Threshold Limits for 2022 and 2023

On November 2, 2022, GRS released its Research Alert, Maximum Deferral and Threshold Limits for 2022 and 2023. This publication summarizes the Internal Revenue Service’s (IRS) new maximum deferral and threshold limits effective for limitation years beginning on or after January 1, 2023. The Internal Revenue Code (IRC) establishes a number of limits on retirement plan benefits and contributions. The limits are located in various sections of the Code and often apply in different ways to private and public-sector plans. Generally, plans must comply with the limits to maintain their tax-qualified status.

This GRS Research Alert is available here.