Tag: unfunded liability

The State Pension Funding Gap: Plans Have Stabilized in Wake of Pandemic

Mary Pat Campbell

Link: https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2021/09/the-state-pension-funding-gap-plans-have-stabilized-in-wake-of-pandemic

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Since the fiscal 2019 reporting period ended, an unprecedented $5 trillion in federal stimulus and other government interventions have buoyed financial markets and strengthened plan balance sheets.2 As a result, state plans earned returns of over 25% in fiscal 2021—a highwater mark not seen since the 1980s. Pew estimates that total unfunded liabilities dropped below $1 trillion by the end of fiscal 2021, which would push state plans to be more than 80% funded for the first time since 2008. (See Figure 1; for more detail, see also Appendix G.) The significant improvement in plans’ fiscal position is due in large part to dramatic increases in employer contributions to state pension funds in the past decade, which boosted assets by more than $200 billion. Since 2010, annual contributions to state pensions have increased by 8% annually, twice the rate of revenue growth. And for the 10 lowest-funded states, the yearly growth in employer contributions averaged 15% over this period. As a result, after decades of underfunding and market losses from risky investment strategies, for the first time this century states are expected to have collectively achieved positive amortization in 2020—meaning that payments into state pension funds were sufficient to pay for current benefits as well as reduce pension debt.

An increase in pension contributions of the size seen over the past decade signals a shift in budget priorities by state policymakers and a recognition that the costs of postponing obligations are untenable if left unaddressed. Although this has improved the outlook for state pension plans, it has also crowded out spending on other important programs and services and left states with less budgetary space to sustain future rises in pension payments.

Author(s): Greg Mennis, David Draine

Publication Date: 14 Sept 2022

Publication Site: Pew Trust

Measuring Public Pension Health

Mary Pat Campbell

Link: https://www.ncpers.org/files/ncpers-pension-metrics-2022.pdf

Webinar slides: https://www.nirsonline.org/wp-content/uploads/2022/03/FINAL-Pension-Health-Webinar-September-2022.pdf

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This report describes a “scorecard”, a standardized summary of pension valuation results (shown on next page), as well as three new metrics, of varying degrees of novelty, to appear on it:


 The Scaled Liability is a measurement of pension liabilities against the size of the economy that supports these liabilities.
 The UAL Stabilization Payment (USP) is an objectively defined cash flow policy standard comparable to
the funding ratio, an objectively defined balance sheet policy standard.
 Risk-Weighting Assets is a proposed method to assess the value of a plan’s assets, taking into account
its capacity to endure the downside risk it has taken on through its allocation of investments.


Author(s): Tom Sgouros

Publication Date: September 2022

Publication Site: NCPERS

New Report Measures Public Pension Health

Mary Pat Campbell

Link: https://www.ai-cio.com/news/new-report-measures-public-pension-health/

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The National Conference on Public Employee Retirement Systems recently released a report entitled “Measuring Public Pension Health: New Metrics, New Approaches” that introduces new mechanisms to account and judge the sustainability of pension plans.

To create these, the report’s author, Tom Sgouros, fellow and co-chair at The Policy Lab at Brown University, formed and hosted the Pension Accounting Working Group, a group made up of actuaries and public pension experts. The group assembled to measure the health of plans, and create new metrics to generate greater insights into a pension’s sustainability, so that trustees and policymakers could make better and more informed decisions.

The working group came up with three new metrics. The first is “scaled liability,” a measurement of pension liabilities against the size of the underlying supporting economy. The second is “unfunded actuarial liability (UAL) stabilization payment,” an objectively defined cash-flow policy standard comparable to the funding ratio. And last is “risk-weighting asset values,” a method to assess the value of a plan’s assets that accounts for a plan’s capacity to endure the downside risk it has taken through the allocation of its assets.

The scaled liability measurement uses economic strength as a proxy for tax capacity. This measurement helps decisionmakers get a read on a plan’s sustainability by providing a comparison between a pension plan and the economic strength of its sponsor. The Federal Reserve includes a comparison of net pension liability with measures of GDP and state revenues in the “Enhanced Financial Accounts” component of its “Financial Accounts of the United States” report.

Author(s): Dusty Hagedorn

Publication Date: 23 Sept 2022

Publication Site: ai-CIO

Citizens must be accurately informed for government to work

Mary Pat Campbell

Link: https://www.news-gazette.com/opinion/columns/sheila-weinberg-citizens-must-be-accurately-informed-for-government-to-work/article_5d93e9cf-73c5-54c9-b762-133f91a94824.html

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An example of questionable disclosure practices is found in the Illinois budgeting and financial reporting process, specifically regarding pension contributions. In 1994, then-Gov. Jim Edgar led an effort to pass a bipartisan bill to solve the state’s $15 billion pension deficit. The plan would resolve the deficit within 50 years. The plan was structured to pay down the debt very slowly in the first 15 years and accelerate at the end. This ensured that sitting politicians in the early days of the plan would not be required to make the necessary tax increases or budget cuts to pay down the debt in a meaningful way.

This program is shown in charts to look like a skateboard ramp, appropriately named the “Edgar Ramp.” The problem is, the plan doesn’t work.

It is so unsuccessful that the Illinois pension deficit has grown from $15 billion to $317 billion as of June 30, 2020, according to Moody’s Investors Service. The state’s latest bond offering document emphasizes, “The state’s contributions to the retirement systems, while in conformity with state law, have been less than the contributions necessary to fully fund the retirement systems as calculated by the actuaries of the retirement systems.”

The latest Illinois Annual Comprehensive Financial Report discloses cash-flow problems, significantly underfunded pension obligations, other post-retirement benefit deficits and multiple references to debt-obligation bonds.

Author(s): Shiela Weinberg

Publication Date: 7 Aug 2022

Publication Site: News Gazette

The Government Pension Reckoning Cometh

Mary Pat Campbell

Link: https://www.wsj.com/articles/the-government-pension-reckoning-cometh-equable-institute-report-11660084312?st=j8a7o7efyyvjtdp&reflink=article_email_share&utm_source=Wirepoints+Newsletter&utm_campaign=24f39fc2e0-RSS_EMAIL_CAMPAIGN&utm_medium=email&utm_term=0_895ee9abf9-24f39fc2e0-30506353#new_tab

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The California Public Employees’ Retirement System reported a negative 6.1% return for the year, which includes a 21.3% positive return on private equity and 24.1% return on real estate as reported through the second quarter of 2022. What will happen if real-estate prices start to fall and some leveraged private-equity buyouts go south amid rising interest rates?

Collective-bargaining agreements limit how much workers must contribute to their pensions, so taxpayers are required to make up for investment losses. Employer retirement contributions—that is, taxpayers—make up 20% of government worker compensation. That amount has soared over the past decade as pension funds tried to make up for losses during the 2008-2009 financial panic.

A recent report by the Equable Institute found that state and local pension plans now are only 77.9% funded on average, which is about the same as in 2008. But some like Chicago’s are less than 40%. Advice to taxpayers in Illinois: Run.

Author(s): WSJ Editorial Board

Publication Date: 9 Aug 2022

Publication Site: WSJ

Ken Griffin talks the pension crisis, a once-secret meeting with Pritzker

Mary Pat Campbell

Link: https://www.chicagotribune.com/opinion/commentary/ct-opinion-ken-griffin-illinois-pension-jb-pritzker-desantis-20220809-jnrzlzbpvbfcnjauz522qcvi4m-story.html?utm_source=Wirepoints+Newsletter&utm_campaign=24f39fc2e0-RSS_EMAIL_CAMPAIGN&utm_medium=email&utm_term=0_895ee9abf9-24f39fc2e0-22956053

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Ken Griffin, founder and CEO of Citadel, spoke in his Chicago office to Editorial Page Editor Chris Jones on Aug. 2. This transcript has been edited for length.

Gov. J.B. Pritzker has said you and he met privately and that you agreed to drop your opposition to his graduated tax proposal if he took on pension reform in Illinois. True?

The Illinois pension crisis is rooted in the issue that politicians of the moment are able to make promises to the public sector workers, where the cost of those promises are borne by taxpayers, far into the future. So we have an intrinsic lack of accountability within the state when it comes to that dynamic between the leaders in Springfield and the public sector unions. (Former Gov.) Bruce Rauner and I actually would speak about this problem from time to time because it’s pretty well known that Bruce felt the state should move to a defined contribution program for the state employees.

And there are elements of that I think are attractive, but because the state employees do not participate in Social Security, a strictly defined contribution proposal leaves the state employee, in my opinion, at undue risk of adverse events if they do not invest their money successfully. … And there’s another issue, which is that the costs of the promises made by cities and counties are not borne by the cities and counties directly, they’re socialized across the entire taxpayer base of the state. So it’s pretty easy for the behavior of a number of Illinois cities to offer incredible increases in pay in final years to boost pension benefits, and that cost comes back to all Illinois taxpayers.

So these are some of the areas in which the average man in the street is really being handed a very significant bill. And the most tragic part of this whole story is that when the state hires people early in their careers, they’re not even placing that much value on these pension plans.

Twenty-two-year-olds don’t make lifetime career decisions on pension benefits. So, from my perspective, as a state we’re much better off having higher starting salaries to attract really good people to serve in the public sector. And, as with Bruce, my advice to the governor was consistently that either the state should mirror the benefits of Social Security as a baseline or, even better, go back to the federal government and get into Social Security again. We should reverse our opt-out from decades ago. And then to the extent that a city wants to offer benefits in excess of the Social Security baseline amount, that’s pay-as-you-go through a 401(k)-equivalent program. …

The proposal that I gave to J.B. to solve the state’s pension problems is exactly what I just shared with you. … It would, in all likelihood, require us to amend the constitution for the state to head in this direction. It might be for new employees only. I’m very sensitive to a promise made and earned. That’s your benefit. That’s a very different talking point than you’re 22 years old and it’s your first day working for the state.

But, big picture, we get the state into a program that looks like what I just described. And it’s gonna accelerate, in all likelihood, the costs of the current system. It may require revenue increases.

And like many of the business leaders in this city, I was very direct. I said, “If you’re willing to engage in pension reform, I’m willing to publicly support you in a tax increase.” It wasn’t graduated versus not graduated. It was just a tax increase.

I would’ve assumed that this meeting would’ve been private for the rest of my life until J.B. decided to open the door and talk about this. What he did talk about in terms of fiscal reform for the state was to restructure the state’s (information technology) budget.

And he felt he could achieve $50 million in budget savings for the state of Illinois by taking an ax toward our IT budget for the state, and that was going to be his victory lap for fiscal discipline in the state of Illinois. Here we have a multibillion-dollar problem on the left and 50 million (dollars) on the right. I was like, “J.B., we’re not having the same conversation here.”

To be clear, that was a fracturing moment between the two of us. … He does not want to use his political capital for good. He wants to maintain that capital to maintain the certainty of staying in power.

Author(s): Chris Jones

Publication Date: 10 Aug 2022

Publication Site: Chicago Tribune

The Teacher Retirement System of Texas needs to adjust its investment return assumptions

Mary Pat Campbell

Link: https://reason.org/commentary/the-teacher-retirement-system-of-texas-needs-to-adjust-its-investment-return-assumptions/

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An adjustment of the assumed rate of return down to 7.0% means the plan will recalculate pension debt upwards in 2023, but will also be better positioned to avoid future debt growth over the longer run. The forecast in Figure 2 compares the growth of TRS’ unfunded liabilities under three scenarios: 

  1. Returns meet TRS assumptions;
  2. TRS experiences two major recessions over the next 30 years;
  3. And, TRS makes actuarially determined contributions (also using the two-recession scenario).

With this actuarial modeling of the system, it is clear that statutorily limited contributions will continue to pose funding risks for TRS that will be borne by Texas taxpayers. A proposed 7.0% assumed return will readjust 2023 unfunded liabilities upwards by $6.5 billion, but the plan will suffer fewer investment losses over the next 30 years when the plan inevitably experiences returns that diverge from expectations. TRS’ unfunded liabilities will remain elevated under the rigid statutorily-set contributions. If, however, TRS was to transition to Actuarially Determined Employer Contributions (ADEC) each year, then even by recognizing higher 2023 debt (under a 7.0% assumption) TRS could shave billions off its unfunded liabilities by 2052 ($74.7 billion down from $81.3 billion with current 7.25% assumption).  

Author(s): Anil Niraula, Zachary Christensen

Publication Date: 15 Jun 2022

Publication Site: Reason

Report: CT’s pension debt remains high despite residents’ personal wealth

Mary Pat Campbell

Link: https://ctmirror.org/2022/08/02/report-ct-pension-debt-personal-income-high-eighth-worst-us/

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When Connecticut deposits roughly $4.1 billion into its pension funds this fall, it will mark the third consecutive year the state used its budget surplus to whittle down the massive pension debt accrued over more than seven decades.

But a recent analysis from The Pew Charitable Trusts provided a sobering reminder of just how far Connecticut still has to go — even considering its great wealth — to overcome decades of fiscal irresponsibility.

Connecticut had reported more than $41 billion in combined debt among its pensions for state employees and for teachers following the 2019 fiscal year. According to Pew, that represented 14.8% of Connecticut’s personal income at the time — more than double the national average of 6.8%.

Connecticut was one of just 10 states that topped the 10% mark, and ranked eighth-worst overall. New Jersey finished at the bottom with pension debt equal to 20.2% of statewide personal income.

Author(s): Keith Phaneuf

Publication Date: 2 Aug 2022

Publication Site: CT Mirror

Unfunded public pension liabilities are forecast to rise to $1.3 trillion in 2022

Mary Pat Campbell

Link: https://reason.org/data-visualization/2022-public-pension-forecaster/

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According to forecasting by Reason Foundation’s Pension Integrity Project, when the fiscal year 2022 pension financial reports roll in, the unfunded liabilities of the 118 state public pension plans are expected to again exceed $1 trillion in 2022. After a record-breaking year of investment returns in 2021, which helped reduce a lot of longstanding pension debt, the experience of public pension assets has swung drastically in the other direction over the last 12 months. Early indicators point to investment returns averaging around -6% for the 2022 fiscal year, which ended on June 30, 2022, for many public pension systems.

Based on a -6% return for fiscal 2022, the aggregate unfunded liability of state-run public pension plans will be $1.3 trillion, up from $783 billion in 2021, the Pension Integrity Project finds. With a -6% return in 2022, the aggregate funded ratio for these state pension plans would fall from 85% funded in 2021 to 75% funded in 2022. 

Author(s): Truong Bui, Jordan Campbell, Zachary Christensen

Publication Date: 14 July 2022

Publication Site: Reason

TAXPAYER PENSION COSTS EXCEEDED ILLINOIS PROJECTIONS BY $13.7 BILLION SINCE 2013

Mary Pat Campbell

Link: https://www.illinoispolicy.org/taxpayer-pension-costs-exceeded-illinois-projections-by-13-7-billion-since-2013/

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Unrealistic assumptions and missed investment returns have meant Illinois taxpayers paid $13.7 billion more for public pensions than state leaders projected five years earlier. Unless the estimates improve, taxpayers will pay an extra $21.3 billion during the next decade.

Illinois does a particularly poor job of figuring out how much money is needed to pay its public pensions: The past decade has seen the projections miss by 16%, which meant taxpayers needed to give $13.7 billion more than was estimated.

Author(s): Justin Carlson

Publication Date: 17 Jun 2022

Publication Site: Illinois Policy Institute

Debtor Nation

Mary Pat Campbell

Link: https://reason.org/debtor-nation/

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Organizations incur long-term financial obligations in forms other than bonds and the U.S. federal government is no exception. Some common types of financial obligations include pension and retiree health care costs for veterans, civilian federal employees, and the general public (through Social Security and Medicare benefit commitments). Looking at the federal government’s balance sheet as of 2021, public holdings of U.S. Treasury securities make up less than one-quarter of total federal liabilities. Unfunded entitlements, like Medicare and Social Security, account for the most at 59% of obligations.

Overall federal obligations have now surpassed $300,000 per American. While substantial in their own right, the debt obligations of state and local governments across the country are dwarfed by the various categories of federal debt.

Author(s): Jordan Campbell, Marc Joffe

Publication Date: 16 May 2022

Publication Site: Reason

Legacy Debt in Public Pensions: A New Approach

Mary Pat Campbell

Link: https://crr.bc.edu/briefs/legacy-debt-in-public-pensions-a-new-approach/

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The inclusion of “legacy debt” – unfunded liabilities from long ago – with current liabilities impedes effective pension policy.

A new approach would separate legacy debt from other unfunded liabilities in order to:

spread the legacy cost over multiple generations; and

properly identify fixed vs. variable costs.

It would also use the municipal bond yield – rather than the assumed return on assets – to calculate liabilities and required contributions.

This approach, by properly allocating costs, would improve intergenerational fairness, government resource decisions, and public credibility.

Author(s): Jean-Pierre Aubry

Publication Date: June 2022

Publication Site: Center for Retirement Research at Boston College