unfunded liability | Pension360

Study Dives Into Strategies of Best-Funded Public Pensions

Center for State and Local Government Excellence released a study last week examining the practices of the best-funded public pension plans in the United States.

The report, titled “Success Strategies for Well-Funded Pension Plans,” attempted to determine if the best-funded pension plans utilized the same strategies to achieve their success.

The report found that there were several keys to maintaining a well-funded pension system: using realistic actuarial assumptions, occasionally adjusting benefits and maintaining residence in a state that makes its full required contributions to the pension system.

BenefitsPro summarized the findings:

The study indicated that each of the systems employed various strategies for making good on the basic concept of a thorough commitment to pension funding, for example:

* The Delaware Public Employees’ Retirement System employs what the study called “a solid and consistent investment strategy that does not change when markets are volatile,” which allowed the system to weather the 2008-2009 financial crisis.

* The Illinois Municipal Retirement Fund has the political authority to enforce the collection of annual required contributions from those government bodies that participate, and can in fact sue government entities for failing to pay in, or ask the state to withhold funding until payment is rendered.

* The Iowa Public Employees’ Retirement System takes what the study called “incremental actions to reduce the unfunded liability to maintain the plan’s long-term fiscal health.”

* North Carolina Retirement Systems consistently employs the use of conservative actuarial assumptions — for example, a 7.25 percent return on investments — and also requires a full actuarial analysis of any proposal that could potentially have an impact on costs or benefits.

Elizabeth K. Kellar, president and CEO of the Center for State and Local Government Excellence, said the findings of the case studies illustrated “the importance of basing a government’s pension funding policy on an actuarially determined contribution, being disciplined about making required contributions, and clearly reporting how and when pension plans will be funded.”

The funding ratios of the featured plans were as high as 99 percent.

Read the full report here.

Photo by TaxRebate.org.uk

CalPERS Encourages Employers to Make Extra Contributions Now For Long-Term Savings

CalPERS is asking municipalities and other government employers to use any extra money available to boost their contributions to the pension system — a move that is tricky in the present moment for cash-strapped cities but that would yield long-term savings.

From CalPensions:

CalPERS is encouraging government employers to make extra payments to reduce their pension debt or “unfunded liability” if budgets allow, saying millions can be saved in the long run.

Annual CalPERS reports to 1,581 local government agencies this fall began showing estimates of future savings when extra payments, going beyond the required amount, are made to the pension fund.

The Newport Beach city council approved a plan for extra payments to CalPERS last month that is expected to save $47 million over 30 years, compared to the standard payment plan.

Huntington Beach approved extra payments to CalPERS last fiscal year based on an analysis by an independent actuary, Bartel Associates, showing each additional $1 million contributed to CalPERS saves $5 million over 25 years.

CalPERS estimates that about 60 employers made 111 extra payments to CalPERS last fiscal year. The new “alternate amortization schedules” in the annual reports to local governments are a response to requests from employers.

“The message we want to get out to employers is that if they have the ability, the financial means, to pay off some of this unfunded liability, it’s a smart business move and can really benefit them over the long run,” Anne Stausboll, CalPERS chief executive officer, said last week.

Read the entire report from CalPensions here.

Pennsylvania Lawmakers: Municipal Pension Reform Needed

Two Pennsylvania state Representatives – Rep. Seth Grove (R) and Rep. Keith Greiner (R) – have penned a column on Lancaster Online arguing for the reform of municipal pension systems.

Specifically, they argue for reforms that would remove pension negotiations from the collective bargaining process and would transfer new hires into a cash balance plan.

Grove and Greiner explain:

Gambling with pension funds needs to end by both local governments and employee unions. Pension negotiations need to be permanently removed from the collective bargaining process to ensure that our police and firefighters are not at risk of having their pensions destroyed, and taxpayers aren’t put on the hook because of short-term and short-sighted decisions.

These two fixes are both long-term solutions, but what can we do in the short term? The answer is change the pension benefit structure for new hires to a cash balance pension plan. A short-term solution will require new revenue to reduce the unfunded liability. A cash balance plan allows municipalities to use excess stock market earnings to pay off the unfunded liability.

Instead of raising taxes or creating new taxes, this allows the pension plan to fund itself. The cash balance concept also has long-term taxpayer protections built in. New hires will have their own accounts, just like a 401(k), which allows them to transfer their retirement between jobs and ensures taxpayers are not on the hook for future underfunding of pensions.

It also provides employees with the ability to take their retirement by monthly payments, which is just like a traditional defined benefit plan. And since a cash balance pension concept is considered a defined benefit pension plan by IRS guidelines, you can still combine pension funds together and ensure you do not underfund the old pension systems. Lastly and most importantly, it will not affect our current public safety personnel’s pensions, but will ensure that new hires will still receive a good pension, which they deserve.

We do not want to honor the dedication and service of public safety personnel by putting them in the poor house after retirement. However, we also do not want to shift costs from pensions to welfare.

Ultimately, these changes are actually about hiring more police and fire personnel and protecting the pensions of current police and fire personnel.

Furthermore, the changes are about ensuring that all municipalities across Pennsylvania are financially stable and that commuter taxes go away. There are tremendous upside benefits to all stakeholders.

Read the entire piece here.