Subscribe (Free) to
Daily or Weekly Newsletters
Post a Job

Featured Jobs

Retirement Plan Administrator

Bates & Company, Inc.
(Remote / Winter Park FL)

Bates & Company, Inc. logo

Loan & Distribution Specialist

AimPoint Pension
(Remote)

AimPoint Pension logo

Defined Benefit Combo Cash Balance Compliance Consultant

Loren D. Stark Company (LDSCO)
(Remote)

Loren D.  Stark Company (LDSCO) logo

Regional Vice President of Sales

The Retirement Plan Company
(Remote / AL / FL / GA / MS)

The Retirement Plan Company logo

Business Development Director

AimPoint Pension
(Remote / Pompano Beach FL / AL / GA)

AimPoint Pension logo

Director of 3(16) Operations

Compass
(Remote / NH / Hybrid)

Compass logo

View More Employee Benefits Jobs

Free Newsletters

“BenefitsLink continues to be the most valuable resource we have at the firm.”

-- An attorney subscriber

Mobile app icon
LinkedIn icon     Twitter icon     Facebook icon

Guest Article

Deloitte logo

(From the April 2, 2012 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

GAO Reports on State Efforts to Improve Sustainability of Government Pension Plans


Most states have made changes to their state-sponsored pension plans in response to recent concerns about plan sustainability, the Government Accountability Office reports. The GAO concludes that most state and local government plans have sufficient assets to cover benefit payments for the next decade, but warns that the gap between plan assets and liabilities will continue to challenge state and local governments well into the future as they face other fiscal pressures.

The March 2012 report reveals that 35 states reduced pension benefits by either adjusting the benefit formula, raising the age or service requirement, or reducing postretirement increases — or a combination of more than one of these. Specifically, it reports that 24 states adjusted the benefit formula, 29 states raised the age or service requirement, and 18 states reduced postretirement increases. Due to legal restrictions these changes tend to apply only to future employees, the report explains. Separately, 25 states increased employee contributions to the plan, while 3 states switched to a hybrid plan (for future employees only).

State and Local Government Pension Landscape

According to the 2009 U.S. Census, there are over 3,400 state and local pension systems in the United States. The GAO report explains that most state and local employees are covered by state-administered plans instead of locally-administered plans (24 million compared with 3 million), and that there are more local government employees than state employees (14 million compared with 5 million). Even though local governments sometimes participate in state-administered plans, they typically retain responsibility for contributing the employer's share of the funding for their employees, the report explains. As a result, local governments contribute more to pension plans than state governments. For fiscal year 2009, local governments contributed 59 percent or $50.6 billion to state and local government pension plans, while state governments contributed 41 percent or $35.5 billion.

The report also notes that over 25 percent of state and local government employees are not eligible for Social Security and do not pay Social Security taxes. As a result, these employees generally receive higher pension benefits, and their employer and employee contributions are higher.

Gap Between Assets and Liabilities

The ratio of plan assets to expenditures has fallen by almost half from the year 2000 to 2009, the GAO reports. In 2000 the ratio was 21.6, while in 2009 the ratio was 12.2. Although individual plan data varies considerably, the report concludes that:

[G]iven the asset levels of most state and local government plans and the pace of expenditures relative to contributions, most plans can be expected to cover their commitments for the near future with their existing assets. For example, even if these plans received no more contributions or investment returns, most large plans would not exhaust their assets for a decade or longer, since they hold assets at least 10 times their annual expenditures.

However, the funded ratios of large state and local government pension plans are showing a growing gap between assets and liabilities, the report states. The aggregate funding ratio declined from 101.3 percent in 2001 to 75.6 percent in 2010. This is the result of assumed investment returns ranging from 6 to 9 percent throughout the 2000s, and the enactment of benefit increases early in the decade when the funded status of the plans was strong, the report explains. Lower funded ratios will require higher contribution rates to sustain the plans, and this comes at a time when state and local governments are, and will continue to be, under increasing pressure to balance their budgets. The report concludes:

Although tax revenues are slowly recovering to pre-2008 levels, going forward, long-term budget issues will likely continue to stress state and local governments and their ability to fund their pension programs. GAO has reported that state and local governments face fiscal challenges that will grow over time, and with current policies in place, the sector's fiscal health is projected to decline steadily through 2060. The primary factor driving this decline is the projected growth in health-related costs. For example, GAO simulations show that the sector's health-related costs will be about 3.7 percent of gross domestic product in 2010, but grow to 8.3 percent by 2060.

The report also observes that some states and localities have adjusted their pension funding practices to limit employer contributions in the short term. This includes making actuarial changes (e.g., expanding the amortization period, adjusting smoothing techniques) to reduce contributions, or simply capping pension contributions. Although these techniques may produce short-term saving for the state and local budgets, they also increase the unfunded liabilities of the plan and will necessitate larger contributions in the future, the report observes. Issuing pension obligation bonds is another technique to manage funding obligations, by which current pension obligations are converted to long-term fixed obligations of the government issuing the bond. The report observes, however, that the bonds can expose plan sponsors to additional market risk (the investment returns on the bond proceeds can be volatile and less than the interest rate on the bonds), and that most state and local governments have not issued sizable pension obligation bonds in the last 6 years.


Deloitte logoThe information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact:

Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.220.2692, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955.

Copyright 2012, Deloitte.


BenefitsLink is an independent national employee benefits information provider, not formally affiliated with the firms and companies who kindly provide much of the content and advertisements published on this Web site, including the article shown above.
© 2024 BenefitsLink.com, Inc.