AN UPDATE ON LOCALLY-ADMINISTERED PENSION PLANS

Transcription

1 RETIREMENT RESEARCH Stte nd Locl Pension Plns Number 18, July 2011 AN UPDATE ON LOCALLY-ADMINISTERED PENSION PLANS By Alici H. Munnell, Jen-Pierre Aubry, Josh Hurwitz, nd Lur Quinby* Introduction The finncil crisis nd ensuing recession hve hd n enormous impct on stte-dministered pension plns. Funded levels declined shrply, the Annul Required Contribution (ARC) incresed to mke up for the fll in funding, nd the percent of ARC pid declined s the bottom fell out of stte revenues. In response, sttes hve incresed employer nd employee contributions, cut employment, slowed wge growth, nd lowered benefits for new employees (nd in few instnces reduced COLAs for current employees, but these inititives hve been chllenged nd re currently in the courts). Less is known bout how loclly-dministered plns hve fred in the lst four yers. This brief ttempts to fill tht gp. The discussion proceeds s follows. The first section describes our smple of 97 loclly-dministered plns from 40 sttes, which ws collected initilly in 2006 nd updted to 2010 for this brief. The second section presents the chnge in the funded sttus of locl plns over the lst four yers, looking seprtely t plns for police/fire, techers, nd generl employees. It lso reports the chnges in the ARC nd the percent of ARC pid during this period. And it compres the experience of loclly-dministered plns with those of stte-dministered plns. The third section reports on the impct of pension contributions to locl budgets. This nlysis is complicted by the fct tht, in ggregte, only 40 percent of locl pension contributions go to loclly-dministered plns, while 60 percent go to stte plns. While good dt re vilble for locl-to-locl contributions, locl-to-stte contributions re less explicit nd in some cses must be estimted. Our clcultions suggest tht totl locl pension contributions for our smple ccount for bout 8 percent of locl budgets. The finl section concludes tht despite the perils fcing cities such s Atlnt, Chicgo, Phildelphi, nd Omh, 1 locllydministered plns, overll, re s well-funded s * Alici H. Munnell is director of the Center for Retirement Reserch t Boston College (CRR) nd the Peter F. Drucker Professor of Mngement Sciences in Boston College s Crroll School of Mngement. Jen-Pierre Aubry is the ssistnt director of stte nd locl reserch t the CRR. Josh Hurwitz nd Lur Quinby re reserch ssocites t the CRR. LEARN MORE Serch for other publictions on this topic t: crr.bc.edu

2 2 those dministered by the sttes. But the demnds of locl plns re only hlf the story in terms of pressure on locl budgets; locl contributions to stte plns will be mjor driver of future budget burdens. Loclly-Administered Plns This brief updtes n erlier survey of loclly-dministered public pension plns. In generl the dt re for 2006 nd 2010, but mny loclities report only every other yer, so the yers vry slightly. The intent ws to include the two lrgest plns from ech stte. 2 Becuse of dt vilbility issues, the originl smple consisted of 84 locl plns from 37 sttes. The updted smple includes 13 dditionl plns, extending the coverge to 97 plns nd 40 sttes. The dt for 20 of these plns come from the Public Plns Dtbse (PPD); the vribles for the other 77 re newly collected (see Appendix). Loclly-dministered plns rnge enormously in size. Three plns the New York City Employee Retirement System, the New York City Techers pln, nd the Los Angeles Employee Retirement System hve ssets in excess of $30 billion. The three smllest plns, Poctello (ID) Police Retirement Pension Pln, City of Sprtnburg (SC) Generl Employees Retirement Pln, nd Owensboro (KY) City Employees Pension Funds ech hold less thn $15 million. Figure 1 shows the comprehensiveness of our stte-dministered nd loclly-dministered dtbses. The stte smple covers 96 percent of ssets nd 89 percent of workers reltive to the totls reported by the U.S. Census Bureu. The smple of locllydministered plns represents 59 percent of locl pln ssets nd 55 percent of locl workers. This outcome is to be expected given tht stte-dministered plns re few nd lrge, while loclly-dministered plns re mny nd often smll. 3 How Funding for Locl Plns Mesures Up In determining the finncil helth of public plns, it is useful to look t two mesures: 1) the funded rtio, which mesures the portion of the pln s libilities covered by ssets; nd 2) whether the employer covers the ARC, which mesures the extent to which the sponsor is keeping up with benefits s they ccrue nd pying down unfunded obligtions. Funded Rtio The funded rtio pln ssets divided by the cturil ccrued libility is snpshot of the pln s funding sttus t given moment in time. 4 Figure 2 presents the ggregte funding informtion for stte- nd Figure 2. Aggregte Funded Rtios for Stte- nd Loclly-Administered Plns, 2006 nd % % 77% 77% Figure 1. Smple Plns s Percent of Totl Assets nd Members, by Level of Administrtion % 89% Assets Members 4 2 Stte Locl 6 59% 55% Sources: Authors clcultions from the PPD (2006 nd 2010); nd vrious finncil nd cturil reports. 4 2 Stte Locl Sources: Authors clcultions from the U.S. Census Bureu (2006); nd the Public Plns Dtbse (PPD), loclly-dministered plns for 2006 nd For both stte nd locl plns, funded levels dropped from the mid-80-percent rnge in 2006 to 77 percent in Of course, the mgnitude of the libilities nd the funded rtios depends on the rte used to discount promised benefits. Discounting by riskless

3 Issue in Brief 3 rte, which reflects the fixed nture of the benefit commitments, increses the libilities significntly nd reduces the funded rtios to the 50-percent rnge. But the mjor messge from the exercise is tht the experience of locl plns on verge hs been very similr to tht of stte plns. Figure 3 shows the funded rtios for the three min types of loclly-dministered plns: generl employees, techers, nd police/fire employees. Of the three, generl employees re the best funded, while techers plns hve the lowest funded rtio nd suffered the gretest decline between 2006 nd Figure 3. Funded Rtios for Loclly-Administered Plns by Type of Pln, 2006 nd % 77% % 78% 79% 7 82% 77% Totl Generl Techers Police/fire Sources: Authors clcultions from the PPD (2006 nd 2010); nd vrious finncil nd cturil reports. Finlly, Figure 4 shows the distribution of funded rtios for stte- nd loclly-dministered plns in Compred to stte plns, locl plns hve Figure 4. Distribution of Stte- nd Loclly- Administered Plns, by Funded Rtio, Stte 5% 1% Locl 15% 16% 48% 39% 34% 29% 6% 5% nerly the sme percentge of plns tht re fullyfunded nd greter percentge of plns with very low levels of funding. The loclly-dministered plns with the lowest funded rtio in our smple re listed in Tble 1. 5 Tble 1. Smple Plns with Lowest Funded Rtios Stte Pln Funded rtio GA Atlnt Bord of Eduction Fund 17.4 RI Providence Employees Retirement System 34.0 PA Pittsburgh Municipl, Police, nd 34.3 Firemen Pension Funds AK Little Rock City Police Pension nd Relief 39.0 Fund b NE Omh Police nd Fire Pension Fund 39.5 DE Dover Generl Employee Pension Pln 43.7 PA Phildelphi Municipl Retirement System 47.0 AK Little Rock City Firemen s Relief nd 48.0 Pension Fund b IL Chicgo Municipl Employees Annuity 50.8 Benefit Fund NE Omh Employees Retirement System 52.9 Sources: Vrious finncil nd cturil reports. Most Atlnt school employees re covered by the Georgi Techers Retirement System (TRS). The Atlnt Bord of Eduction Fund, which is dministered by the City of Atlnt Generl Employees Pension Fund, covers the minority of school district employees who re not covered under the TRS. b Closed to new hires in The ARC While the funded rtio provides snpshot, the question remins whether the pln sponsor hs funding strtegy nd is sticking to it. One mesure of funding discipline is whether the sponsor mkes the ARC, which the Government Accounting Stndrds Bord (GASB) defines s the norml cost plus pyment to mortize the unfunded libility, generlly over 30- yer period. 6 The first question is wht hs hppened to the ARC since As shown in Figure 5 on the next pge, becuse of the deteriortion in the funded sttus of plns, the ARC incresed over the four-yer period t both the stte nd locl levels. Sources: Authors clcultions from the PPD (2006 nd 2010); nd vrious finncil nd cturil reports.

4 4 Figure 5. ARC s Percent of Pyroll for Stte- nd Loclly-Administered Plns, 2006 nd % 14% % 22% Ech yer, pln sponsors report the rtio of the employer s ctul contribution to the ARC. Figure 7 shows the percent of the ARC pid by stte- nd loclly-dministered plns. While sponsors t the stte level significntly reduced the percent of ARC pid, loclly-dministered plns ppered to do better job in covering the ARC. Therefore, while locl plns in generl hve higher ARC per dollr of pyroll, they lso contribute higher percentge of totl ARC ech yer. These offsetting fctors explin why the funded rtios for locl plns declined less thn stte plns between 2006 nd Stte Locl Figure 7. Percent of ARC Pid by Stte- nd Loclly-Administered Plns, 2006 nd 2010 Sources: Authors clcultions from the PPD (2006 nd 2010); nd vrious finncil nd cturil reports % % 89% 95% In ddition to chnge over time, it is importnt to note tht the ARC t the locl level is substntilly lrger thn t the stte level. A prt of the explntion is tht police nd fire plns, which re more common t the locl level, re expensive becuse prticipnts retire t younger ges nd receive benefits for longer time. But, s shown in Figure 6, the ARC for generl employees nd techers is lso more expensive t the locl level. We suspect, but cnnot fully confirm, tht this pttern reflects lck of Socil Security coverge t the locl level. 7 Figure 6. ARC s Percent of Pyroll for Loclly- Administered Plns, by Type of Pln, 2006 nd % 22% 21% 17% 17% 14% 37% 48% Totl Generl Techer Police/fire Sources: Authors clcultions from vrious finncil nd cturil reports Stte Locl Sources: Authors clcultions from the PPD (2006 nd 2010); nd vrious finncil nd cturil reports. How Burdensome Are Pension Plns on Locl Budgets? While the previous section focused on how well sponsors were funding their commitments; this section explores the size of those commitments reltive to the sponsor s budget. Pension contributions s percent of locl budgets provide frmework for understnding how pensions will ffect other loclly-finnced ctivities. The finncil commitment of locl governments consists of two components: 1) required contributions to the loclly-dministered plns (which comprise virtully ll the contributions to these plns); nd 2) contributions tht loclities re required to mke to stte-dministered plns.

5 Issue in Brief 5 Mny locl governments mke considerble contributions to stte systems. In the ggregte, these pyments ccount for 61 percent of totl locl contributions. But, s shown in Figure 8, these percentges vry enormously cross sttes. They rnge from zero in Vermont where the entire stte retirement system is finnced t the stte level to 100 percent in Alsk, Hwii, Mine, Mississippi, Montn, Nevd, New Mexico, nd Wyoming where ll loclities re covered under the stte pln. 8 Figure 8. Locl Governments Contributions to Stte-Administered Plns s Percent of Their Totl Contributions, by Stte, % 12% 1 12% 44% 16% Source: Authors clcultions from the U.S. Census Bureu (2006, 2008). The centrl question is how much pension plns re currently costing loclities. Answering tht question requires two steps. The first step, which involves employer contributions to locl plns, is strightforwrd. Ech city in the smple publishes Comprehensive Annul Finncil Report (CAFR) tht lists the pyment the city mde to ll of its locl plns. The second step, which involves locl contributions to stte plns, is more chllenging. City CAFRs for our smple include contributions mde directly by the city to the stte for generl employees nd police nd fire, but typiclly not for techers. For most techers, pension contributions re mde by n independent school district, ech of which produces its own CAFR. Since these reports re not redily vilble, we were ble to collect the dt for only 49 of our 72 loclities. For those loclities without school district dt, the best we could do ws to pply the sttewide percentges from the Census, djusted ccording to the dt we hd for the 49 loclities. 9 To ssess the burden of these contributions on locl finnces, totl pension contributions were divided by budget dt for the sponsoring entity for 2006 nd 2008 (the ltest vilble) from the Census. 10 The results show tht pensions on verge ccounted for 6.4 percent of totl locl expenditures in 2006 nd 8.0 percent in 2010 (see Figure 9). Figure 9. Locl Government Contributions to Loclly- nd Stte-Administered Plns s Percent of Budget, 2006 nd % 8% 4% 6.4% Sources: Authors clcultions from vrious finncil nd cturil reports; the U.S. Census Bureu (2006, 2008); nd the U.S. Census Bureu (2006b, 2008b). As lwys, ggregte dt hide lot of vrition. Loclities tht hve seriously underfunded plns nd/ or generous benefits or prticipte in stte plns with these chrcteristics contribute significntly more. As shown in Figure 10 on the next pge, pension contributions ccount for more thn 12 percent of totl budget outlys in 14 percent of the smple. The importnt point is tht significnt pressure comes from loclities prticiption in stte-dministered plns, s well s from required contributions to their own plns.

6 6 Figure 10. Distribution of Loclities by Pension Contributions s Percent of Locl Budgets, % 36% 14% 7% 7% 0-4% Source: Authors clcultions from vrious finncil nd cturil reports; nd the U.S. Census Bureu (2006b, 2008b). Conclusion Press ccounts would suggest tht loclly-dministered plns would be significntly less well-funded thn those dministered by the stte. But our smple of 97 plns from 40 sttes indictes tht, in 2010, loclly-dministered plns were s well-funded s stte plns. It would be mistke to be too snguine. A number of city plns re significntly underfunded nd will require substntil increses in their contribution rtes to eliminte the unfunded libility. And loclities re mjor contributor to stte-dministered plns. So their fte is s much tied to wht hppens to plns t the stte level s it is to the plns they sponsor themselves.

7 Issue in Brief 7 Endnotes 1 See, for exmple, Drdick (2010); Neumnn (2010); nd Stirgus (2010). 2 The survey dt were collected from Acturil Reports, Comprehensive Annul Finncil Reports for the individul plns, nd Comprehensive Annul Finncil Reports for the loclity tht dministers the pln. 3 Stte-dministered plns ccount for only 9 percent of totl stte nd locl plns, but 84 percent of ssets nd 89 percent of ctive members. In totl, the Census reports 218 stte-dministered nd 2,332 locllydministered systems, compred to 107 nd 97 in our smples, respectively. (See U.S. Census Bureu, 2008.) 4 These rtios re not quite comprble cross plns in tht cturil cost methods differ. For exmple, plns using the entry ge norml (EAN) cost pproch will report lrger ccrued libility nd lower funded rtio for ny level of ssets thn plns using the projected unit credit (PUC) pproch. Of prticulr concern in the erlier survey ws the use of the ggregte cost method, which lwys shows funded rtio of 100 percent. However, in recent yers, mny plns using the ggregte cost method hve lso begun to report libilities using the EAN or PUC method. Currently, just one pln in our smple continues to show only method similr to ggregte cost St. Louis School Employees Retirement System nd it is excluded from the funding discussion. 5 The Portlnd (OR) Fire nd Police Disbility Retirement Fund hs funded rtio of less thn 1 percent becuse the sponsor purposely finnces the pln on py-s-you-go bsis. For this reson, it is not included in the tble. 6 See Government Accounting Stndrds Bord (1994, 1994b). 7 We sent out n inquiry to the 72 loclities in our smple. So fr, 24 hve responded. Among the plns in these loclities, nerly 60 percent were not covered by Socil Security much greter thn the percentge without coverge t the stte level. Interestingly, within single stte the coverge mong locl plns does not necessrily lign with the coverge for sttedministered plns. For exmple, Atlnt Generl Employees nd Police & Fire re not covered by Socil Security, while employees of the Stte of Georgi re covered. Similrly, in Florid, employees of the city of Jcksonville re not covered while their counterprts who work for the stte re covered. 8 Alsk does hve the Anchorge Police nd Firemen Retirement Pln, but it is closed to new hires. 9 Our smple focuses on loclities tht dminister their own lrge pension plns nd therefore contribute less to stte plns thn most loclities reported in the Census. In order to djust for this difference between our smple nd the Census totls, we took the ggregte percent of locl contributions mde to the stte for the 49 loclities with full dt, nd divided it by the ggregte percent of locl contributions mde to the stte indicted by the Census. Then, for ech loclity for which we did not hve full dt, we djusted the percentge from the Census by this ggregte rtio. 10 The Bureu of Economic Anlysis reports ggregte expenditures from locl governments up to 2009 in the Ntionl Income nd Products Accounts. These dt show tht totl expenditures decresed by 2.2 percent between 2008 nd Substituting 2008 Census dt for 2010 budgets is imperfect; however, we ssume tht the drop in expenditures between 2008 nd 2009 ws offset by n increse in expenditures in 2010, implying tht the 2008 nd 2010 budgets my not differ substntilly.

8 8 References Bureu of Economic Anlysis Ntionl Income nd Product Accounts. Wshington, DC: U.S. Deprtment of Commerce. Drdick, Hl Chicgo Fces Crisis Over Pension Funding, How to Py for It. The Chicgo Tribune (October 18). Governmentl Accounting Stndrds Bord Sttement No. 25: Finncil Reporting for Defined Benefit Pension Plns nd Note Disclosures for Defined Contribution Plns. Norwlk, CT. Governmentl Accounting Stndrds Bord. 1994b. Sttement No. 27: Accounting for Pensions by Stte nd Locl Governmentl Employers. Norwlk, CT. Neumnn, Jennette Pensions Push Txes Higher: Cities Tp Homeowners for Revenue s Workers Retirement, Helth Costs Rise. The Wll Street Journl (December 24). Public Plns Dtbse nd Center for Retirement Reserch t Boston College nd Center for Stte nd Locl Government Excellence. Stirgus, Eric Atlnt Leders Grpple with Rising Pension Costs. The Atlnt Journl-Constitution (Februry 22). U.S. Census Bureu Employee-Retirement Systems of Stte nd Locl Governments. Wshington, DC. Avilble t: retire/. U.S. Census Bureu. 2006b. Stte nd Locl Government Finnces. Wshington, DC. Avilble t: U.S. Census Bureu Employee-Retirement Systems of Stte nd Locl Governments. Wshington, DC. Avilble t retire/. U.S. Census Bureu. 2008b. Stte nd Locl Government Finnces. Wshington, DC. Avilble t:

9 APPENDIX

10 Issue in Brief 10 Tble. Funded Rtio nd Annul Required Contribution s Percent of Pyroll for Smple of Loclly- Administered Plns, 2006 nd 2010 Stte City Pln nme Funded rtio (%) ARC/pyroll (%) AK Anchorge Police nd Firemen Retirement Pln b AL Birminghm Retirement nd Relief System AR Little Rock Firemen s Relief nd Pension Fund b N/A c Police Pension nd Relief Fund N/Ac N/A c AZ Phoenix Employee Retirement System CA Contr Cost Retirement System Los Angeles Employees Retirement System Fire nd Police Pension System Los Angeles Employee Retirement System Mrin Employees Retirement Assocition Ornge Employees Retirement System Sn Diego Retirement System Sn Frncisco City nd Retirement System CO Denver Employees Retirement System School Retirement System CT Greenwich Town Retirement System Hrtford Municipl Employee Retirement Fund New Hven Employee Retirement Fund Police nd Firemn s Retirement Fund DC District of Police nd Fire Retirement Fund Columbi Techers Retirement Fund DE Dover Generl Employee Pension Pln New Cstle Wilmington Employees Retirement System Police Pension Fund b b FL Jcksonville Retirement System Mimi Firefighters nd Police Officers Retirement Trust Penscol Generl Pension nd Retirement Fund b 57.4 b Tllhssee Retirement System GA Atlnt Bord of Eduction Fund Fire Fund Generl Employees Pension Fund d Police Fund b b 52.5 Cobb Government Employees Pension Pln ID Poctello Police Retirement Pension Pln N/A c N/A c

11 11 Stte City Pln nme IL Chicgo Municipl Employees Annuity Benefit Fund Funded rtio (%) ARC/pyroll (%) Techers Pln KS Wichit Employees Retirement System Police nd Fire Retirement System KY Lexington Police nd Firemen Retirement Fund Owensboro Employees Pension Funds N/A c N/A c LA Bton-Rouge City Prish Retirement System MA Boston Retirement Bord MD Bltimore Employees Retirement System Fire-Police Employees Retirement System Montgomery e Employees Retirement System MI Detroit Employees Generl Retirement System Policemen nd Firemen Retirement System Wyne Employees Pension Pln f MN Duluth Techers Pln Minnepolis Employee Retirement Fund b b Police Relief Assocition b b St. Pul Techers Pln MO St. Louis Police Retirement System Retirement System School Retirement System NC Chrlotte Firefighters Retirement System ND Bismrck Employees Pension Pln Frgo Employees Retirement System Police Pension System NE Omh Employees Retirement System Police nd Fire Pension Fund School Employee Retirement System NH Mnchester Employees Contributory Retirement System NJ Jersey City Municipl Employees Pension Fund 52.4 g N/A 12.8 N/A g NY New York City Employee Retirement System Fire Deprtment Pension Fund Police Pension Fund Techers Fund OH Cincinnti Employees Retirement System OK Oklhom City Employees Retirement Fund Tuls Employees Retirement Fund

12 Issue in Brief 12 Stte City Pln nme Funded rtio (%) ARC/pyroll (%) OR Portlnd Fire nd Disbility Retirement Fund h b b PA Phildelphi Municipl Retirement System Pittsburgh Municipl, Police, nd Firemen Pension Funds RI Providence Employees Retirement System SC Greenville Fire Deprtment s Pension Pln Sprtnburg Generl Employees Retirement Pln b 78.9 b SD Sioux Flls Employees Retirement System TN Knox Employees DB Pln Techers DB Pln Memphis Retirement System Nshville- Employees Benefit Trust Fund Dvidson TX Austin Employee Retirement System Dlls Employees Retirement Fund Houston Firefighters Pln Police Officers Pension System VA Firfx Police Officers Retirement System School System Supplementl Retirement System Newport Employees Retirement System News Norfolk Employees Retirement System Richmond Retirement System VT Burlington Employees Retirement System WA Settle Employees Retirement System WI Milwukee Employees Retirement System City Milwukee Employees Retirement System WV Wheeling Employees Retirement Funds 100 N/A g 0.0 N/A g Plns tht re closed to new hires. b ARC-to-pyroll is bnormlly high for closed plns with few remining ctive employees nd very smll pyrolls. c Closed plns with zero remining ctive employees nd therefore no pyroll. d Employees hired s of June 30, 2011 re enrolled in new hybrid pln. For the DB benefit, the multiplier ws reduced from 3 percent to 1 percent nd the vesting period ws incresed to 15 yers. The employee will contribute 8 percent. For the 401(k), the employee will contribute 3.75 percent with 100 percent employer mtch. e Closed to new hires except for public sfety brgining unit employees nd prticipnts in the Gurnteed Retirement Income Pln. f Effective October 1, 2001, the defined benefit pln ws closed to new hires nd replced by hybrid retirement pln. g Updted reports could not be found for these plns. h As of November 7, 2006, new hires re enrolled in the Public Employees Retirement System (PERS) of Oregon. The Fire nd Disbility Retirement Fund mkes pyments to PERS on py-s-you-go bsis.

13 13 About the Center The t Boston College ws estblished in 1998 through grnt from the Socil Security Administrtion. The Center s mission is to produce first-clss reserch nd eductionl tools nd forge strong link between the cdemic community nd decisionmkers in the public nd privte sectors round n issue of criticl importnce to the ntion s future. To chieve this mission, the Center sponsors wide vriety of reserch projects, trnsmits new findings to brod udience, trins new scholrs, nd brodens ccess to vluble dt sources. Since its inception, the Center hs estblished reputtion s n uthorittive source of informtion on ll mjor spects of the retirement income debte. Affilited Institutions Americn Enterprise Institute The Brookings Institution Msschusetts Institute of Technology Syrcuse University Urbn Institute Contct Informtion Boston College Hovey House 140 Commonwelth Avenue Chestnut Hill, MA Phone: (617) Fx: (617) E-mil: crr@bc.edu Website: The thnks AARP, Bnk of Americ, Invesco SM, LPL Finncil, MetLife, MFS Investment Mngement, Ntionl Reverse Mortgge Lenders Assocition, Prudentil Finncil, Stte Street, TIAA-CREF Institute, T. Rowe Price, nd USAA for support of this project. 2011, by Trustees of Boston College, Center for Retirement Reserch. All rights reserved. Short sections of text, not to exceed two prgrphs, my be quoted without explicit permission provided tht the uthors re identified nd full credit, including copyright notice, is given to Trustees of Boston College,. The reserch reported herein ws supported by the Center s Prtnership Progrm. The findings nd conclusions expressed re solely those of the uthors nd do not represent the views or policy of the prtners or the Center for Retirement Reserch t Boston College.