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Millions of state and local gov¿t. employees are promised pension benefits when they retire. There is a fed. interest in ensuring that all Americans have a secure retirement. Recently, new accounting standards have called for the reporting of liabilities for future retiree health benefits. It is unclear what actions state and local governments may take once the extent of these liabilities becomes clear, but such anticipated fiscal and economic challenges have raised questions about the unfunded liabilities for state and local retiree benefits. This is a report on: (1) the current structure of state and local gov¿t. pension plans and how pension benefits are protected and managed; and (2) the current funded status of state and local gov¿t. pension plans. Charts.
Congress is considering establishing federal standards for state and local government pension plans similar to those imposed on private plans by the Employee Retirement Income Security Act of 1974. The act generally provides that the minimum standard for pension funding by private employers be an annual contribution for normal costs plus the amount needed to amortize current unfunded liabilities in 40 equal annual installments. Public pensions are becoming a large financial burden on state and local governments, and that burden will increase in the future. Many jurisdictions do not systematically fund retirement benefits accruing to their employees. Adopting a pension plan funding standard similar to that required by the act would have serious initial impact on some jurisdictions. During the years the plans are on a pay-as-you-go basis, their unfunded liabilities will continue to grow. At the end of the amortization period of 40 years required for private plans, their unfunded liabilities will more than triple and yearly pay-as-you-go contributions will increase several fold. To protect the pension benefits earned by public employees and to avert fiscal disaster, state and local governments need to fund the normal or current cost of their pension plans on an annual basis and amortize the plans' unfunded liabilities. Although sponsoring governments are responsible for sound funding of state and local government plans, the federal government has substantial interest in these pension plans. Many jurisdictions have increasingly relied on federal grant funds and revenue sharing to help meet pension plan costs. These plans directly affect the continued well-being and security of millions of state and local government employees and their dependents.
This paper examines the role and function of pension plans covering state and local government employees in the United States. Covering about 16 million employees (including teachers, fire fighters, police, members of the judiciary, and many other state and local employees), these plans manage a substantial stock of financial assets -- close to $1 trillion -- and receive annual contributions from employees and government revenues totaling about $56 billion. Using data gathered from a variety of different sources, some of which have only recently become available, we describe the benefits, financing, and management of these plans, and identify some of the prominent challenges facing these pension plans in the next decade.
Pursuant to a congressional request, GAO reviewed the status of public pension plan funding, focusing on the basic pension plans of state and local governments. GAO found that: (1) states and localities with underfunded pension plans run the risk of reducing future pension benefits to taxpayers or raising revenues; (2) unfunded liabilities for all state and local pension plans totalled $200 billion in 1992; (3) contributions to pension funds in 1992 fell short of the actuarially required amounts by 60 percent; (4) 75 percent of state and local pension plans involved in a Public Pension Coordinating Council (PPCC) survey were underfunded; (5) more than half of the pension plan sponsors surveyed continued to make payments to pay off their unfunded liabilities; (6) between 1990 and 1992, 20 percent of the plans were both underfunded and not receiving required sponsor contributions; and (7) of 117 plans with complete data in 1990 and 1992, 90 were underfunded.
Funding of State and Local Government Pension Plans and Need for Congress To Closely Monitor Such Plans
Over 27 million employees and beneficiaries are covered by state and local government pension plans. However, the recent economic downturn and associated budget challenges confronting state and local governments pose some questions as to the sustainability of these plans, and what changes, if any, state and local governments are making to strengthen the financial condition of their pension plans. The Government Accountability Office (GAO) was asked to examine recent trends in the financial condition of state and local government pension plans; and strategies state and local governments are using to manage pension costs and the impacts of these strategies on plans, sponsors, employees, and retirees. This book analyses sector-wide financial conditions based on national-level data on pension funding from the U.S. Census Bureau and others, and reviews information on recent state legislative changes affecting government pensions from annual reports prepared by the National Conference of State Legislatures (NCSL).
There are over 3,400 state and local pension systems in the United States, according to the most recent Census Bureau Survey of State and Local Public-Employee Retirement Systems. Most large plans are state plans, and more state and local employees are covered by state-administered plans than by locally-administered plans (about 24 million members and beneficiaries compared with about 3 million). However, there are more local government employees than state government employees (about 14 million compared with about 5 million), and while local governments sometimes participate in plans administered by states, the local governments generally retain responsibility for contributing the employer's share of funding to the plans for their employees. As a result, local governments contribute more to pension plans each state fiscal year, overall, than do state governments.