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 15, 2023, 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 5.2% 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) 2020.

Furthermore, state and local government direct general spending on public pensions has remained relatively stable over the past 30 years, declining from 3.4% in FY 1992 to about 2.3% in FY 2002. It increased to 5.0% in FY 2017 where it remained until rising to 5.2% in FY 2020. In aggregate, state and local governments contributed $186 billion to pension funds in FY 2021, which represents an increase of 3.5% from FY 2020. This change is projected to be about 5.1% of projected state and local government direct general spending.

The brief also finds that across state and local governments in 2020, 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 1992, investment earnings amounted to about 64% of all public pension plan revenues, with an additional 25% from employer contributions, and 11% from employee contributions.

The brief also includes a table showing state and local government pension contributions in 2020 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 13, 2023, 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 2023, the PIA formula is: 

  • 90% for the first $1,115 of AIME; plus
  • 32% of AIME over $1,115 and through $6,721 (if any); plus
  • 15% of AIME over $6,721 (if any).   

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 2022, 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 735,000 Social Security beneficiaries (or about 1% of all beneficiaries) had spousal or survivor benefits reduced by the GPO as of December 2022. Of those, 52% were spouses and 48% were widows and widowers, with about 70% of all GPO-affected beneficiaries had their benefits fully offset and about 30% had their benefits partially offset.  

The report is available here. 

American Academy of Actuaries Public Plans Committee Releases Practice Note on Fixed Rate Pension Funding

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American Academy of Actuaries Public Plans Committee Releases Practice Note on Fixed Rate Pension Funding

On February 9, 2023, the American Academy of Actuaries (AAA) Public Plans Committee released its Public Policy Practice Note, Fixed Rate Pension Funding. The practice note is intended to serve as a guide to actuaries that advise retirement boards. It provides information for actuaries to consider for working with public defined benefit pension plans that use fixed rate funding.

The practice note states, “In a fixed rate plan, the retirement system usually invests the assets and administers the benefits but has no direct control over either the contributions or the benefit levels… [O}ver time, when investment returns vary, either contributions or benefits need to adjust.” The information covered in the practice note includes: 1) fixed rate funding policy; 2) specifics on the actuarial benchmark contribution; 3) actuarial benchmark contribution (ABC) for tiered fixed rate plans; 4) fixed rate plan design; and 5) fully funded fixed rate plans.

Judith Kermans, President and CEO of GRS, and Brian Murphy, Senior Consultant and past President with GRS, currently serve as members of the AAA Public Plans Committee.

The practice note is available here.

NCPERS Releases 2022 Public Retirement Systems Study

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NCPERS Releases 2022 Public Retirement Systems Study

On February 7, 2023, the National Conference of Public Employee Retirement Systems (NCPERS) released the results of its NCPERS 2023 Public Retirement Systems Study: Trends in Fiscal, Operational, and Business Practices. The annual comprehensive survey provides information on investment experience, actuarial assumptions, plan administration and operations, trends, innovations and best practices. 

Some of the key findings include: 

  • During 2022, the average funding levels (the value of the assets in the pension plan divided by an actuarial measure of the pension obligation) increased. Average funding levels rose to 77.8% in 2022 from 74.7% in 2021. 
  • Of the reporting pension systems, investment returns were the most significant source of revenue at 68% of overall pension revenues while employer contributions totaled 24% and employee contributions totaled 8%.
  • In 2022, the average investment return assumption was 6.86% compared with 7.07% in 2021.
  • Overall, the reporting funds experienced solid returns. On average, 20-year returns were 7.4%, 10-year returns were 9.0%, 5-year returns were 9.7%, and 1-year returns were 11.4%. 
  • Of those reporting funds that offered a cost-of-living adjustment (COLA) for members, the average was 2.0% in 2022 as compared with 1.7% in 2021.
  • The overall average expense for administering the funds was 64 basis points (or 64 cents per $100 invested).

The survey included 195 state and local government pension funds with more than 19.6 million active and retired members and total assets exceeding $3.0 trillion in actuarial and market value.  Of the pension funds surveyed, 56% were local government funds and 44% were state pension funds.  

The report is available here. 

MissionSquare Publishes Report on Public Service Workforce Financial Wellbeing

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MissionSquare Publishes Report on Public Service Workforce Financial Wellbeing

On February 2, 2023, the MissionSquare Research Institute (formerly the Center for State and Local Government Excellence at ICMA-RC or SLGE) published its report, Examining the Financial Wellbeing of the U.S. Public Service Workforce. The Research Institute analyzed the financial health of public service employees. The report indicated that although many state and local employees have financial challenges, many public sector employers help to strengthen the financial security of their workforce through their employee benefit offerings.

In addition, the report indicated that state and local governments continue to be challenged with attracting and retaining employees. For many Americans, including public sector employees, financial security is an increasing concern especially for those facing economic uncertainty and strained household budgets.

The key findings include:

  • Many public sector employees reported having some financial difficulties. Specifically, nearly 20% of all public sector employees and about 17% of public education employees reported not being able to afford health care.
  • From 2017 through 2019, 14% of all households employed in the public sector indicated that they could not pay all of their bills as well as 11.3% of public education employees.
  • Public sector employers and employees have concerns about the retirement security of the state and local workforce. About 41% of public sector human resources professionals indicated that their employees are financially prepared for retirement. Over 80% of public sector employees reported being concerned that they will have sufficient funds to last through retirement.
  • Access to employee benefits helps to strengthen the financial security of public sector households including retirement plans, health and life insurance, health and education savings accounts, and paid time off. Financial security is also supported with improved tenure and job security in the public sector which helps to ensure more predictable budgeting for short-term and long-term household expenses.
  • In general, public sector employees save more than private sector employees. Public sector employees had higher combined employer and employee contribution rates to defined contribution plans (401(k) or 403(b) type plans) at 15.7% as compared with private sector employees at 13%.

The report is available here.

Important ASOP No. 4 Changes Affecting Public Plan Actuarial Valuations

The Actuarial Standards Board (ASB) adopted a revision to Actuarial Standard of Practice (ASOP) No. 4, Measuring Pension Obligations and Determining Pension Plan Costs or Contributions. The revised ASOP will be applicable to actuarial valuations performed beginning in the spring of 2023.

This article highlights some of the revisions to ASOP No. 4 and its implications for public pension plans.