Pension Law and Policy,
By Michael Karsch

By Michael Karsch, Legislative Representative

New confidence in local and state pensions in this country came from the Brookings Institution in mid-July. Their experts got together with Brandeis International Business School’s Rosenberg Institute of Public Finance, Washington University in St. Louis, and the University of Chicago’s Harris Institute of Public Policy to discuss recent research on municipal capital markets and state and local fiscal issues.

While prefunding of pension liabilities is a real issue for local governments, there is also the other side of the coin, which is that the pensions are sustainable and consistent with history. This is where one can reflect on the fact that nearly all governments will continue to exist and not go bankrupt. There are exceptions, like the city of Detroit and some counties in California.

By and large, the pension benefits can be paid reliably by nearly all government agencies. Contributions by active employees may have to be increased, new hires with different pensions can gradually reduce liabilities, and local cities may have to increase their budgetary support to keep the pension plans solvent.

Almost all plans for local pensions “have always operated far short of full prefunding,” according to the Bookings paper, and to try for full prefunding would not be an enhancement of the general welfare. This refers to the impact that any city’s full funding of the pension program by spending a larger and larger percentage of their budget on just pensions would mean cutting more and more municipal programs and vital services. The report sees slow but substantial improvement in the predicted funding shortfalls.

Wilshire Consulting reports that the aggregate funded ratio for state pension plans increased by 1.4 percent, resulting in a funding ratio of 73 percent, which is considered not too bad (80 percent is the real goal). Asset values increased 2.6 percent versus a 0.7 percent increase in liability values. Wilshire attributes the asset values increase to more contributions by the state budgets, not to exciting investment returns. Wilshire also reports that CalPERS, the largest public pension fund in the United States, is assuming that its investments will generate a return of 6.1 percent annually over the next decade. But just a one percent point change in its assumed discount rate would reduce its funded level by eight or nine percentage points, increasing its funding gap by around $30 billion. That is CalPERS, to which the City does not belong.