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State and Local Pensions

State and Local Pensions: What Now?

Alicia H. Munnell
Copyright Date: 2012
Pages: 254
  • Book Info
    State and Local Pensions
    Book Description:

    In the wake of the financial crisis and Great Recession, the health of state and local pension plans has emerged as a front burner policy issue. Elected officials, academic experts, and the media alike have pointed to funding shortfalls with alarm, expressing concern that pension promises are unsustainable or will squeeze out other pressing government priorities. A few local governments have even filed for bankruptcy, with pensions cited as a major cause.

    Alicia H. Munnell draws on both her practical experience and her research to provide a broad perspective on the challenge of state and local pensions. She shows that the story is big and complicated and cannot be viewed through a narrow prism such as accounting methods or the role of unions.

    By examining the diversity of the public plan universe, Munnell debunks the notion that all plans are in trouble. In fact, she finds that while a few plans are basket cases, many are functioning reasonably well.

    Munnell's analysis concludes that the plans in serious trouble need a major overhaul. But even the relatively healthy plans face three challenges ahead: an excessive concentration of plan assets in equities; the risk that steep benefit cuts for new hires will harm workforce quality; and the constraints plans face in adjusting future benefits for current employees. Here, Munnell proposes solutions that preserve the main strengths of state and local pensions while promoting needed reforms.

    eISBN: 978-0-8157-2413-1
    Subjects: Finance, Political Science

Table of Contents

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  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Acknowledgments
    (pp. vii-viii)
  4. 1 Introduction
    (pp. 1-11)

    Vallejo, California (2008), Prichard, Alabama (2010), and Central Falls Rhode Island (2011) have filed for bankruptcy, with commentators citing pension promises to public employees as a major cause (see box).¹ A Googling of the words “state,” “pension,” and “crisis” found more than a twentyfold increase between 2000 and 2011 (see figure 1-1). The Governmental Accounting Standards Board (GASB) has promulgated new standards that could dramatically change how pension liabilities and costs are reported. Many states have substantially reduced benefits for new employees and increased employee contributions across the board. Yet the majority of states should be able to recover from...

  5. 2 State and Local Pensions: From the 1970s to Today
    (pp. 12-47)

    This chapter has three purposes. The first is to explain how we got where we are today in terms of state and local pension finance. The second is to describe the current pension landscape and to introduce thePublic Plans Database, which serves as the basis for much of the empirical material covered in subsequent chapters. The final purpose is to tip our hat to the other major component of retirement benefits for public sector employees—namely, retiree health insurance. The unfunded liabilities for state-administered retiree health plans amount to about one-fifth of those for state-administered pensions.

    The discussion proceeds...

  6. 3 The Discount Rate and Other Accounting and Funding Issues
    (pp. 48-74)

    It is widely agreed that each generation of taxpayers should pay the full cost of the public services it elects to receive. And taxpayers need to know the total compensation paid to public employees in order to evaluate whether the government has been a good steward of their resources. If a worker’s compensation includes a defined benefit pension, the cost of the benefit earned each year should be recognized at the time the worker performs his or her job, not when the pension is paid in retirement. The benefits earned in a year, however, involve a stream of promises far...

  7. 4 Why Are Some Plans in Trouble and Others Not?
    (pp. 75-104)

    The discussion in chapter 3 progressed as if state and local plans were one homogeneous whole. As discussed earlier, nothing could be further from the truth. Plans vary within states; plans for teachers and general employees are very different from plans for police and fire personnel. Plans administered at the state level have different financing structures than those administered by localities. And plans of similar types vary enormously from state to state. That is, the plan for general employees in California costs more than twice as much as a percentage of payroll as that in Georgia. Also, participants in some...

  8. 5 Are Public Plans Budget Busters?
    (pp. 105-138)

    While the previous chapter explored the state of funding among state and local plans, this chapter looks at current and future pension expense as a share of state and local budgets. The important question for policymakers is whether spending on pensions will squeeze out other priorities. Such a squeeze could result from the need to compensate for past shortfalls in the case of severely underfunded plans or from the demands of relatively expensive plans even if they are fairly well funded.

    The chapter proceeds as follows. The first section provides an overview of state and local finances, highlighting the structural...

  9. 6 Are Public Employees Overpaid or Underpaid?
    (pp. 139-169)

    The previous chapters focused on one component of compensation for state and local workers—namely, pensions. They explored the extent to which government employers had put aside money for future benefits and the extent to which shortfalls will require future contributions that squeeze out other priorities. The discussion showed that funded levels have declined sharply in the wake of the financial crisis and that the recession decimated state and local revenues, making it impossible for governments to compensate for the shortfall. As a result, politicians everywhere are looking for ways to reduce pension costs.

    Proposals to cut pensions are usually...

  10. 7 Do Defined Contribution Plans Have a Role in the Public Sector?
    (pp. 170-209)

    The financial crisis and its aftermath generated two types of responses from sponsors of state and local government pensions. The first was to cut back on existing defined benefit plan commitments by raising employee contributions, reducing benefits for new employees, and in some cases suspending the cost-of-living adjustment for existing retirees. The second response was to initiate proposals to shift some or all of the pension system from a defined benefit to a defined contribution plan. This chapter explores the implications of such a shift for the employer and the employee in order to answer the question whether defined contribution...

  11. 8 Making State and Local Pensions Better
    (pp. 210-230)

    This chapter looks to the future. The first section recaps the main findings of this book to provide context for discussing the major challenges facing sponsors of state and local pensions going forward. The key point is that while a few bad actors exist, many public plans are functioning well, create little risk to the state or local sponsor, and offer benefits that, together with cash wages, provide total compensation comparable to that in the private sector. The second section then identifies the three major challenges facing almost all public plans—excessive holdings of equities, sharp cuts in benefits for...

  12. References
    (pp. 231-248)
  13. Index
    (pp. 249-254)
  14. Back Matter
    (pp. 255-256)