Guidelines for Funding Public Pensions
States and local governments need to develop a pension funding policy and a new report offers guidelines for developing that policy to help states and local governments continue to reform and improve their public retirement systems.
The report comes from the Big 7, a consortium of seven associations in Washington, D.C., serving state and local governments, which includes The Council of State Governments.
The report, Pension Funding: A Guide for Elected Officials, comes in response to new standards issued by the Governmental Accounting Standards Board last year. Those new standards focus on how state and local governments should account for pension benefit costs. The new standards, however, don’t address how states should calculate a key component of those costs—the annual required contribution.
“State pensions remain an essential tool in attracting and retaining great talent to staff and lead state government,” said David Adkins, CSG’s executive director/CEO. “The covenant the states make with their employees remains a high priority in budgeting. Many states face challenges in funding these obligations as retirees live longer and more employees begin to receive benefits than are paying into the system.
“States have been aggressive and creative problem solvers in addressing these challenges and many recent examples of cooperative and collaborative efforts to solve pension issues have emerged.”
To help states understand the new standards, the Big 7 and other organizations established the Pension Funding Task Force. The task force developed a number of policy objectives and guidelines, which are included in the new report. The task force recommends that pension funding policies be based on the following five general policy objectives:
Have a pension funding policy based on actuarially determined contributions;
Build funding discipline into the policy to ensure promised benefits can be paid;
Maintain intergenerational equity so the cost of employee benefits is paid by the generation of taxpayers who receives services;
Make employer costs a consistent percentage of payroll; and
Require clear reporting to show how and when pension plans will be fully funded.
In addition to CSG, members of the Big 7 are the National Governors Association, National Conference of State Legislatures, National Association of Counties, National League of Cities, U.S. Conference of Mayors and the International City/County Management Association. Additional task member associations included the National Association of State Auditors, Comptrollers and Treasurers; Government Finance Officers Association, National Association of State Retirement Administrators and National Council on Teacher Retirement.