PRESERVING THE FUTURE: GFOA's Guidance Role in Pensions

By Miller, Girard | Government Finance Review, April 2006 | Go to article overview

PRESERVING THE FUTURE: GFOA's Guidance Role in Pensions


Miller, Girard, Government Finance Review


Throughout GFOA's history, its members have shaped the evolution of public employee retirement and benefits plans in North America, reflecting the stakeholders' need for professional guidance, and the membership's desire to respond to state and federal legislative activity. To fully appreciate the role the association has played over the past century, a brief review of the history of public employee retirement and benefit plans provides a frame of reference. In fact, there are some lessons from the early days of retirement plan design that might well be remembered as we enter the second century of professionalism in governmental finance.

HISTORY OF PUBLIC PENSION PLANS

When GFOA was founded in 1906, there were only a few state and local government pension plans and none as we know them today. The first municipal pension plan in the United States was established by New York City for its police officers in 1857. Like many of the earlier military plans, the city's police pension plan was little more than a disability plan until a retirement feature was added in 1878.

The concept of providing a post-employment benefit spans two millennia.' Records of payments to aged public workers by the leaders of various nation-states date as far back as the Roman Empire, when Augustus (in 13 B.C.) provided a pension plan to military veterans and subsequently established an inheritance and sales tax regime to pay for it (on what we would today call a pay-as-you-go or "pay-go" basis). Military pensions have a long history throughout world civilization, and by the 18th century France, Spain, Austria, and Prussia provided disability benefits for aged soldiers. The U.S. Continental Congress established pensions for its navy and army in 1775 and 1776, respectively. By the following century, Britain led the pack with a system that paid retired and disabled officers roughly 50 percent of their former salaries. Historically, most of these arrangements were funded from general revenues, although the U.S. Navy had intermittently "funded" its pension plan with the spoils of war.

Following the galvanizing lead of Bismarck in Germany in 1889, civilian public pensions became more common in Europe at the turn of the 20th century. In the first decade of GFOA's existence, municipal workers' pension plans had also been established in Austria-Hungary, Belgium, France, the Netherlands, Spain, Sweden, and the United Kingdom. Cities in the U.S. quickly followed suit, and by 1916 municipal (police, fire, or teacher) pension plans had been established in 159 cities. In 21 of these cities, other general employees were eligible to participate.

State-level plans in that era were typically limited to teachers, with Massachusetts establishing the first general state plan in 1911. The states were slower to adopt general employee pension plans, however, with only six states offering such benefits to civilian workers other than teachers by 1929. Generally, these plans were financed from current revenues (pay-go). Some had attributes of defined contribution or money purchase plans in which workers' contributions were accumulated to purchase a modest pension or annuity upon retirement. Appropriations from the state or the city were usually sporadic, and hardly systematic or "scientific."

The first pension plan for federal civilian employees, adopted in 1920, was likewise pay-go and remains so today, with the newer Federal Thrift Plan providing a defined contribution plan alternative to the more traditional Federal Employees Retirement System and older civil service plan.

By modern standards, many of these plans would have been considered well-intended but insufficient in their design. Only by the late 1920s did a handful of states (New Jersey, Ohio, and Vermont) adopt the concept of a defined benefit plan with actuarial funding.

Accounting practices were hit-or-miss in certain of the early plans, with limited accountability in some jurisdictions. …

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