NCPERS Releases 2024 Public Retirement Systems Study

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NCPERS Releases 2024 Public Retirement Systems Study

On February 8, 2024, the National Conference of Public Employee Retirement Systems (NCPERS) released the results of its NCPERS 2024 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 2023, the average funding levels (the value of the assets in the pension plan divided by an actuarial measure of the pension obligation) decreased. Average funding levels declined to 75.4% in 2023 from 77.8% in 2022. 
  • Of the reporting pension systems, investment returns were the most significant source of revenue at 63% of overall pension revenues while employer contributions totaled 28% and employee contributions totaled 9%.
  • In 2023, the average investment return assumption was 6.91% compared with 6.86% in 2022 for responding funds.
  • Overall, the reporting funds experienced varying returns. On average, 20-year returns were 7.3%, 10-year returns were 7.9%, 5-year returns were 6.8%, and 1-year returns were -1.9%. 
  • Of those reporting funds that offered a cost-of-living adjustment (COLA) for members, the average was 2.2% in 2023 as compared with 2.0% in 2022.
  • The overall average expense for administering the funds was 56 basis points (or 56 cents per $100 invested). 

The survey included 157 state and local government pension funds with more than 13.8 million active and retired members and total assets exceeding $2.3 trillion.  Of the pension funds surveyed, 52% were local government funds and 48% were state pension funds.  

The report is available here.

S&P Global Identifies Factors for U.S. Public Pensions and OPEBs to Monitor in 2024

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S&P Global Identifies Factors for U.S. Public Pensions and OPEBs to Monitor in 2024

Recently, S&P Global Ratings published its report, Five U.S. Public Pension and OPEB Points to Watch in 2024. In this report, S&P Global identified five factors for U.S. public pensions to monitor in the coming year.

The factors include:

  • In fiscal 2024, U.S. public pension funded ratios are expected to improve due to positive market results in the first half of the year.
  • U.S. public pensions may face increasing risks since discount rates used to measure the funded ratio are based on more diverse and less transparent asset allocations.
  • Recent inflation volatility affects many pension and retiree medical (other postemployment benefit (OPEB)) elements, and the Consumer Price Index (CPI) has extended below long-term rates.
  • The issuance of Pension Obligation Bonds (POBs) halted in 2023 and issuers may wait for the current volatile market to settle with lower interest rates.
  • An aging population intensifies contribution risk due to market volatility.

According to the report, “U.S. pension plans, on average, assume annual asset returns of 7% and returns above or below this assumption equate to a “gain” or “loss” compared with planned inflows that might affect contributions and credit stress. We estimate that a typical public pension plan will have experienced a gain due to a return of about 6.5% for the first half of fiscal 2024 (13% annualized), which is 3.0% above the half-year assumption of 3.5% (annualized to 7.0%).”

The report is available here.

American Academy of Actuaries Publishes Issue Brief on the 2023 Social Security Trustees Report

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American Academy of Actuaries Publishes Issue Brief on the 2023 Social Security Trustees Report

On January 17, 2024, the American Academy of Actuaries (AAA) released its issue brief, An Actuarial Perspective on the 2023 Social Security Trustees Report. The brief was developed by the AAA’s Social Security Committee and presents the Committee’s perspective regarding the 2023 Trustees Report, which examines the Social Security program’s long-term solvency issues.  

Importantly, the Trustees Report reflects the recent reduction in the assumed level of economic growth. The cumulative reduction of about 3% affects the system by suppressing realized and projected increases in payroll tax income. According to the report, “In addition to the economic results, the system’s financial status was affected by changes in demographic assumptions and methodology, and by the shift in the valuation period (which adds a year of less favorable finances at the end of the 75-year projection period).” 

The key findings include:

  • The combined trust fund reserves are projected to become depleted during 2034, one year earlier than projected last year. 
  • If changes to the program are not implemented before 2034, only 80% of scheduled benefits would be payable after depletion in 2034, declining to 74% by 2097.
  • The actuarial deficit increased from 3.42% of taxable payroll to 3.61% of taxable payroll.   

Congress is urged to act to ensure the sustainable solvency of the Social Security program.

The AAA’s Social Security Committee prepared this issue brief. Brian Murphy, a retired senior consultant and past president of GRS, serves on this committee.

The brief is available here.

 

CMS Office of the Actuary Releases 2022 National Health Expenditures Report

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CMS Office of the Actuary Releases 2022 National Health Expenditures Report

Recently, the Centers for Medicare & Medicaid Services (CMS) released their report on the National Health Expenditure Accounts (NHEA). The NHEA measures annual U.S. expenditures for health care goods and services, public health activities, government administration, net cost of health insurance, and investments related to health care.

According to the CMS, U.S. health care spending grew 4.1% in 2022 and reached $4.5 trillion, which was faster than the increase of 3.2% in 2021, but much slower than the increase of 10.6% in 2020. As a share of the gross domestic product (GDP), health care spending increased 9.1% in 2022. 

In 2022, health care spending for the broad categories of services and products include:

  • Hospital care services spending increased 2.2% to $1.4 trillion, down from 4.5% in 2021;
  • Physician and clinical services spending increased 2.7% to $884.9 billion, down from 5.3% in 2021; and
  • Retail prescription drug spending increased 8.4% to $405.9 billion, up from 6.8% in 2021.  

In 2022, the growth in federal government spending increased 1.0%, compared to a decrease of 3.4% in 2021. Private businesses’ health care spending increased 6.0% in 2022, down from 7.6% in 2021; households’ health care spending increased 6.9% in 2022, up slightly from 6.8% in 2021; and state and local government health care spending increased 6.5% in 2022, up slightly from 6.2% in 2021.  

Further information is available here. 

MissionSquare Reports on 2024 Public Service Workforce Trends

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MissionSquare Reports on 2024 Public Service Workforce Trends

On January 9, 2024, the MissionSquare Research Institute (formerly the Center for State and Local Government Excellence at ICMA-RC or SLGE) released information related to its report, Top Public Service Workforce Trends for 2024. The Institute researched how public sector employers can manage and support their current workforce, as well as attract new talent. 

According to the report, although 2023 has been challenging for state and local governments and other public service organizations, it has helped leaders gain insights on workforce management systems and support while attracting new talent. The report provides various strategies and actions that public service employers can take to be “employers of choice” and help to improve retention and recruitment. Based on their research, the key workforce trends to monitor in 2024 include: 

  • Engage new generations of talent;
  • Expand retirement plan auto-features;
  • Support employees’ financial security;
  • Understand and address student loan debt; and
  • Modernize workforce systems and classifications.

According to the Institute, “The demographics and size of the public workforce continues to evolve, particularly with generational change, increased diversity, the impacts of automation, and heightened competition for talent. Paying attention to the trends…can help employers optimize recruitment and retention.”

Further information is available here. 

S&P Global Finds U.S. States’ Credit Stable in Uncertain Times

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S&P Global Finds U.S. States’ Credit Stable in Uncertain Times

On January 4, 2024, S&P Global Ratings published its report, U.S. States 2024 Outlook: Credit Stability Endures in Unstable Times. In fiscal 2024, states are expected to experience slower economic growth and likely decreased revenues. S&P Global indicated that states’ credit fundamentals seem strong; however, the fiscal 2025 budget considerations will likely focus on managing increasing costs, lessening federal government support and potential tax policy changes that may further negatively affect revenues.

According to the report, “Through the pandemic, states maintained better funding discipline, which has resulted in an overall strengthening of the long-term funding progress and a lessening of the risks associated with statewide pension plans. Pension and other postemployment benefits liabilities are not evenly distributed by state, with many having well-funded statewide plans. Pension risks remain for some, though, and OPEB are largely being funded on a pay-as-you-go basis, meaning pension and OPEB funding and risk management will remain key components of our fixed-cost analysis.”

The report is available here.

NASBO Releases Fall 2023 Fiscal Survey of States

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NASBO Releases Fall 2023 Fiscal Survey of States

On December 19, 2023, the National Association of State Budget Officers (NASBO) released its semi-annual report, Fall 2023 Fiscal Survey of States. The report updates information on the states’ fiscal conditions, including aggregate and individual state data on general fund receipts, expenditures and balances. The survey was conducted by NASBO and completed by state budget officers in all 50 states. 

The report highlights states’ enacted budgets for fiscal 2024. The survey shows state general fund spending in fiscal 2024 is projected to total over $1.26 trillion, an increase of 6.5% over fiscal 2023 levels. In fiscal 2023, general fund spending totaled $1.19 trillion, an increase of 11.8%. This increase followed an increase of 16.0% in fiscal 2022, which was the highest annual growth rate recorded in the Fall Fiscal Survey in 40 years. Adjusted for inflation, general fund spending increased 8.0% in fiscal 2022 and 7.0% in fiscal 2023. The 2023 increase was due to several factors including: 1) higher inflation; 2) one-time spending on investments from surplus funds; 3) increased spending from general funds since federal funds were expiring in certain areas; and 4) lower baseline due to spending reductions for some states in fiscal 2021.

In fiscal 2023, general fund revenues totaled over $1.2 trillion, an increase of 0.9% over fiscal 2022 levels. In 2024 enacted budget forecasts, general fund revenue is projected to decline 1.8%. In fiscal 2023, the slower revenue growth than expected was mainly due to: 1) the impact of recently enacted tax cuts; 2) weaker stock market performance in 2022; 3) slower growth in consumption; 4) changing spending patterns; and 5) lower inflation.

In fiscal 2023, 41 states reported year-over-year increases in their rainy day funds (also referred to as budget stabilization funds). As a percentage of general fund spending, the median rainy day fund balance increased from 10.8% in fiscal 2022 to 12.3% in fiscal 2023. Based on states’ enacted budgets, it is also projected to increase to 13.8% in fiscal 2024.  

The full report and summary are available here.

NCSL Reports on State Legislation for Prescription Drug Access and Affordability in 2023

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NCSL Reports on State Legislation for Prescription Drug Access and Affordability in 2023

On December 13, 2023, the National Conference of State Legislatures (NCSL) reported that the highest priorities in 2023 state legislation were related to prescription drug access and affordability. According to the NCSL, “Of the more than 800 bills proposed across all 50 states, Washington, D.C., and Puerto Rico, nearly 150 were enacted. The year’s major legislative trends included pharmacy benefit manager reforms, lowering patient costs and increasing access, and curbing high drug prices.”   

Over the past 10 years, states have attempted to reduce drug costs by addressing various business practices of pharmacy benefit managers (PBMs). In 2023, about 25% of prescription drug legislation was directed at PBM reforms. 

In 2024, it is expected that state legislators will likely continue to focus on laws intended to increase access to prescription drugs and help control drug costs.

Further information is available here.

NASBO Releases 2023 State Expenditure Report

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NASBO Releases 2023 State Expenditure Report

On December 6, 2023, the National Association of State Budget Officers (NASBO) released its 2023 State Expenditure Report: Fiscal Years 2021-2023. 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 2023 report, total state spending (including general funds, other state funds, bonds, and federal funds) has been significantly affected by a combination of federal COVID-19 pandemic aid and rising state tax collections over the past three years. In fiscal 2023, total state spending is estimated to reach $2.96 trillion, up from $2.78 trillion in fiscal 2022. This represents an increase of 6.5%, which is mainly driven by additional general fund spending.

Other key findings include: 

  • In fiscal 2022, general fund spending increased 14.3%, which is the highest rate over the past 37-year history of the State Expenditure Report. However, in fiscal 2023, the growth in general fund spending slightly declined to 11.3%. The increase is primarily due to: 1) states spending down surplus funds following two consecutive years of strong revenue growth in fiscal 2021 and fiscal 2022; and 2) more modest revenue surpluses in fiscal 2023.
  • Spending from the states’ own funds (general funds and other state funds combined, excluding bonds) increased 12.3% in fiscal 2023.
  • In fiscal 2022, the “Medicaid” program category had the largest gain in total state spending at 11.5% while the “transportation” category is estimated to have the highest growth in fiscal 2023 at 12.9%.

The report is available here.

NIRS Report Examines Impacts of Switching Away from Defined Benefit Plans

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NIRS Report Examines Impacts of Switching Away from Defined Benefit Plans

On December 3, 2023, the National Institute on Retirement Security (NIRS) released its report, No Quick Fix: Closing a Public Pension Plan Leads to Unexpected Challenges. The report analyzed the experience of five states that shifted new employees away from defined benefit (DB) pensions to defined contribution (DC) or cash balance plans. Of the states that switched to a DC plan, the report indicated that there were increases in costs, negative cash flow and employee turnover. In addition, the retirement security of plan participants in DC plans was negatively impacted due to a large amount of “leakage” of retirement assets from the DC accounts that replaced pension plans.  

Other report findings include:

  • Of the states studied, employer costs significantly increased after closing a pension plan. In some states, poor funding practices preceded the plan closure and funding discipline improved only after closing the plan. In one of these plans, employer costs remain high even after 26 years of being closed. However, the ongoing contributions of new active members combined with sound funding practices show strong results.
  • In the closed plans, cash flows have become more negative over time as demographics shift and the plan initiates spending down its assets.
  • The available retention data indicates that retention is poor in the new plans or tiers even though claims exist that younger workers will be attracted to savings-based plans (i.e., DC and cash balance plans). The analysis indicates that workforce management has become a challenge in many of these states with closed plans.
  • When leaving a public sector job, many workers have cashed out their DC plan account balances and those amounts are likely not used for producing retirement income. The available data suggests that DC plans are failing to help many workers accumulate sufficient retirement savings.

The report concludes, “Closing a public DB plan offers no quick fix to the ongoing challenges of maintaining a robust and thriving public workforce and managing existing financial obligations. Instead, experience shows that closing a DB pension plan creates more problems for public sector employer[s] and employees for many decades.”

The report is available here.