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1 1 (September 2015)

handle is hein.amenin/aeiaavs0001 and id is 1 raw text is: September 2015 The state of public pension funding: Are government employee plans back on track? By Andrew G. Biggs The public-sector pension industry is claiming a comeback from losses suffered during the Great Recession. But this recovery is greatly exaggerated: even years past the end of the recession, most pension sponsors are unable to make their full annual contributions, and pensions are taking as much investment risk as ever. The first step to effective pension reforms is an honest, accurate view of the costs and risks that public plans impose on government budgets and taxpayers. P ension plans for state and local government employees have been a matter of political debate and policy concern since the Great Recession brought these plans' funding woes to public attention. Policy analysts highlighted their multitrillion -dollar unfunded liabilities, while some financial analysts warned that pension costs could push multiple local-and perhaps even state-governments into default and bankruptcy. Some cities, such as Detroit, Michigan, and San Bernardino and Stockton, California, have entered bankruptcy, and pension costs played a role in each case. Yet, as strong investment returns have slightly improved pension funding, pension advocates argue that public plans are back on track. The National Conference on Public Employee Retirement Systems declares, The truth is that the vast majority of public pensions are well funded and are growing stronger as the economy continues to recover (Kim 2014). The National Association of State Retirement Administra- tors (NASRA) likewise asserts that most states have made a reasonably good effort to fund their plans. There is a perception that many plans and states have failed, NASRA claims, when in fact it's only a hand- ful of states (Brainard and Brown 2014). Such claims are used to push back against efforts to reform public employee pension plans. In reality, most plan sponsors have failed to make the minimum actuarially calculated requirements for their plans, and the percentage of sponsors making full payments has declined substantially over time. In fiscal year 20 13, the most recent for which comprehensive data are available, only 41 percent of plans received their full annual required contribution (ARC), barely half the number as in 2001. Likewise, public employee plans are taking substantially more investment risk than in the past, a practice that increases the volatility of governments'required contributions and destabi- lizes state and local government budgets. The true extent of public pension funding shortfalls is hidden by a nearly unique set of accounting rules promulgated by the Governmental Accounting Stan- dards Board (GASB) that allow public plans to dis- count, or value, guaranteed future pension liabilities using the assumed rate of return on a portfolio of risky assets. Unlike the rules applied to corporate pensions or to public employee plans in other countries, GASB accounting rules ignore the value of the government's liability to pay the plan's promised benefits in the very AMERICAN ENTERPRISE INSTITUTE1 1

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