Continued scrutiny of state and local government retirement plans is expected to continue in 2016. GFOA will continue to educate members of Congress about the true fiscal condition of public pension systems, consider whether proposed initiatives provide the flexibility the public sector needs to provide retirement security to its employees, and oppose congressional proposals that undermine state and local governments’ authority to effectively govern and finance their pension plans.
Often, congressional proposals to address pension “problems” are not limited to the plans that are in distress. Instead, they seek to impose a federal mandate on all state and local governments in areas within the fiscal sovereignty of those states and localities. These proposals are conflicting, administratively burdensome, and costly. Moreover, some of their assumptions about management of pension funds directly contradict GFOA's best practices on pension and benefits administration.
The damage weathered by many systems through the tough fiscal years post-great recession has not gone unnoticed by the fiduciaries of these funds. Nor has it been ignored by state and local governments. There is no fiscal epidemic threatening state and local pensions, but pension funding levels are still not close enough to peak funding. Some legitimate concerns still exist about the extent of underfunding in certain jurisdictions; however, in these cases, a modest increase in contributions to take advantage of compound interest, or modifications to employee eligibility and benefits, or both, will be adequate to remedy the underfunding problem.
Related Resource Centers
Best Practices & Advisories
- Sustainable Funding Practices for Defined Benefit Pensions and Other Postemployment Benefits - GFOA recommends that state, provincial, and local government officials ensure that the costs of DB pensions and OPEB are properly measured and reported.
- Funding Defined Benefit Pensions - GFOA recommends that every state and local government that offers defined benefit pensions formally adopt a funding policy that provides reasonable assurance that the cost of these benefits will be funded in an equitable and sustainable manner.
- Pension Obligation Bonds - GFOA recommends that state and local governments do not issue pension obligation bonds
- Responsible Management and Design Practices for Defined Benefit Pension Plans - GFOA recommends that under no circumstance should state and local government plan sponsors engage in pension contribution holidays or make insufficient contributions.
- Additional Best Practices and Advisories
GFOA Public Policy Statements
- Retirement Security - GFOA supports government policies and practices that help to achieve the dual goals of individual retirement security and economically viable communities.
Additional Pension Resources
Pension Plan Database
The true state of U.S. pension funds can be determined by examining information from the Pension Plan Database, a free and publicly available resource that is developed and maintained through a collaboration of the Center for Retirement Research at Boston College, the Center for State and Local Government Excellence, and the National Association of State Retirement Administrators. The database captures and reports key data for public retirement systems and plans that together account for more than 85 percent of the participants and assets in the U.S. public pension community.
State and Local Fiscal Facts
The data show that all state systems and many local public pension plans are enacting significant reform measures to remedy the underfunding problem. From 2009 to 2014, every state has made changes to pension benefit levels, contribution rate structures, or both. In addition, state and local governments operate under a long-term time horizon, and they have taken, and continue to take, steps to strengthen their pension reserves. Furthermore, state and local government retirement systems do not operate in a vacuum – they are established and regulated by state laws and, in many cases, further subject to local governing policies and ordinances. This means that localized decision making and policy implementation are well suited to addressing the vast majority of pensions systems in the United States. Many of the policy changes governments have made were tailored to the unique needs of the pension stakeholders, without the need for ill-fitting federal mandates or interference.
Ten Things You Should Know about Pension Disclosure
The controls and pension reporting environment is not well known, even reform as a result of the freshly minted GASB Statement No. 68, Accounting and Financial Reporting for Pensions – An Amendment of GASB Statement No. 27. Finance officers are in the midst of implementing this comprehensive reform of pension liability reporting and explaining the change to the press, to plan members, and to elected boards. Congress’ proposals to add another number (as proposed in PEPTA Legislation) to the litany of conflicting numbers that describe the funded status of pension systems could be confusing or be threatening to constituents’ retirement expectations, which will likely be an unintended consequence of this legislation. We have compiled this easy-to-understand guide for Congress and their staff.
- Download Resource: Ten Things You Should Know About Pension Disclosure
Pension Funding: A Guide for Elected Officials
GFOA’s best practices and Elected Officials Guides also provide examples of sound local policymaking. GFOA also communicates this information to congressional offices. For example, a recent GFOA best practice, Sustainable Funding Practices for Defined Benefit Pensions and Other Postemployment Benefits, recommends that public officials and associated trustees should, at a minimum, adopt a funding policy that stipulates full funding (i.e., a target funded ratio of 100 percent or more). The funding policy should also stipulate that employer and employee contributions be made regularly – failing to fund the plan’s actuarially determined contributions during recessionary periods impairs investment returns by not providing enough money to invest when stock prices are low. As a result, long-term investment performance will suffer and ultimately require higher contributions. A disciplined and systematic funding policy that is endorsed by more than 18,600 GFOA members is an effective tool against broad, ineffective federal legislation.