Abstract
Fluctuations in the financial market have introduced tremendous volatility into the financing of public pension plans, which in turn have a destabilizing effect on local government general fund budgets. In this chapter, we explore the reasons behind the volatility in pension financing and its countercyclical effect on local general fund budgets. More specifically, we examine three factors that jointly determine public pension financing: pension benefit design, pension contributions, and investment returns. Most importantly, we look at the effect of investment returns on employer pension contributions—which are financed by local government budgets. Solutions are then suggested as to how to mitigate this volatility in pension financing and its destabilizing effect on local government budgets.
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Notes
- 1.
For a more detailed discussion of actuarial valuation, please see Peng (2008).
- 2.
There is no data on the funded ratio for all public pension plans. However, since only a hundred or so state pension plans control vast majority of public pension assets, the attention is mostly focused on the funded ratio of these plan, as the data collection is much easier. National Association of State Retirement Administrators conducts annual survey of large state level pension plans, and the state level funded ratio is from their survey. Wilshire Associates is the only organization that has conducted annual survey of local pension plans since 2000. Each year it examines 106 large local pension plans, and the ratio in this figure is from this survey (Wilshire Consulting 2012).
- 3.
It should be noted that the percentage calculated this way is quite similar to the results obtained when comparing pension contribution to the actual general fund. In 2013, Merritt Research Services LLC did a study on the finance of 250 largest cities in the U.S., and found that the median ratio of pension contribution over general fund was 10 % in 2012, up from 7.75 % in 2007 (Peters 2013). These are very similar to 9.78 % in 2011 and 7.85 % in 2007 obtained by using the method described in this chapter.
- 4.
Data in this paragraph on CalPERS can be found in CalPERS (2005).
- 5.
In 2008, the period to calculate final average salary was reverted back to 3 years, although the normal retirement age is still kept at 55.
References
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Peng, J. (2015). Local Government Pension Fund Management and Budget Stability. In: Hou, Y. (eds) Local Government Budget Stabilization. Studies in Public Budgeting, vol 2. Springer, Cham. https://doi.org/10.1007/978-3-319-15186-1_5
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DOI: https://doi.org/10.1007/978-3-319-15186-1_5
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