Will Public Pensions Run Out of Money?

• By: Ady
• On: 01/09/2012 17:59:08
• In: Commentary

While the brief comprehensively reviews the proposed changes by the Governmental Accounting Standards Board (GASB) and the potential impact on state and local public pension plans, most of the attention is focused on the column in Appendix B that lists the year in which each individual plan will run out of funds.

PensionDialog interviewed the CRR to better understand this table.

PD: Are the dates in your issue brief actual projections of when the plans in your sample could become insolvent?

CRR: These dates are not reflective of an ongoing plan, and are intended only for use in implementing GASB's particular liability concept. In other words, these dates are for GASB accounting purposes only. In practice, the run-out dates of an ongoing plan would also depend on cash flows resulting from future employees.

PD: How were the dates derived?

CRR: The methodology used to calculate the “run-out” date was GASB's rather than our own—again, based on an accounting method that does not accurately portray all aspects of an ongoing plan.

PD: How should policymakers interpret Appendix B—or the points you make in the brief as a whole?

CRR: The issue brief is intended to alert policymakers of how GASB proposals will affect the reported funded levels of public sector plans.  As we state in the issue brief, it would be unfortunate if the press and politicians characterized these new numbers as evidence of a worsening of the crisis when, in fact, states and localities have already taken numerous steps to put their plans on a more secure footing.  We also assert that policymakers should be mindful, when making reforms, that pensions are an important part of the total compensation of public sector workers.

PD: You do have another issue brief which also includes purported exhaustion dates – also found in Appendix B – entitled “Can State and Local Plans Muddle Through?” What can you tell us about these dates?

CRR: While this research was designed to determine exhaustion dates for ongoing plans, we also acknowledge this is a pessimistic portrayal of plan finances. We assumed that plans only contribute the normal cost, we based our initial stock of assets on 2009 lows, and we didn't incorporate any changes for new hires. So it's fairly safe to assume, that the “ongoing” analysis we performed in March 2011 is a worst-case scenario.

PD note: State and local retirement systems hold in trust some $2.7 trillion, equal to roughly 13 times the amount these funds paid out last year. Public employees and employers contribute to these trusts. Even if the trusts earn only a relatively modest annual return of six percent, their investment earnings alone would be enough to pay for most of the benefits they distribute each year.

Combined with employee and employer contributions, and considering the many changes that have been made to benefit levels in recent years, assertions of widespread pending pension fund insolvencies are simply unfounded.