UPDATED Dec. 9, 2020 - The overall funded status of public pension plans across the U.S. has mostly held steady during the recession caused by the novel coronavirus pandemic; however, there are concerns that state and local governments may consider reducing required contributions. Texas state and local public pensions could consider adopting alternative funding strategies to address legacy pension costs and stabilize costs over time.
A new report from the National Institute on Retirement Security highlights public pension plans' funding strategies in 13 states. The approaches outlined in the report include separate funding approaches for existing liabilities and on-going plan costs, employer side accounts, pension obligation bonds, withdrawal liabilities, and dedicated revenue streams from sources such as sports betting.
NIRS, a Washington D.C.-based nonprofit organization that promotes retirement security's value to employees, employers, and the economy, released the report on Dec. 7. NIRS held a webinar on Dec. 9, offering an overview of the research.
"The good news is that unlike the recent Great Recession, investment markets have been resilient during the COVID-19 recession," says Dan Doonan, NIRS executive director, in a news release announcing the report. "As a result, public pension funds have not experienced significant losses in the financial markets, and the overall funded status of public pension plans has held steady. However, there certainly are concerns that cash-strapped state and local governments may look at reducing required contribution to public pension plans."
A decrease, Doonan says, could be problematic for a handful of public pensions that are not adequately funded due to past funding practices.
"It is our hope that these pension funding case studies are a useful reference guide for policymakers interested in ensuring a well-functioning public pension system while delivering retirement benefits that have been earned by state and local government employees," he says.
The NIRS report, Beyond the ARC: Innovative Funding Strategies from the Public Sector, is available here. The document is co-authored by Doonan and NIRS Research Manager Tyler Bond.
The authors collected several funding strategies, including wholesale tactics for a large statewide plan to more targeted reforms that allow participating employers to control how costs are paid overtime. The strategies extend beyond paying the Annual Required Contributions (ARC) or Actuarially Determined Employer Contribution, according to a synopsis of the report on NIRS' website.
Each of the approaches described in the research document alters the nature of plan funding in different ways. Although the cited case studies are not an "exhaustive list of funding strategies," according to a news release, "the examples illustrate how a wide range of goals can be achieved with various policies."
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