Academic journal article Chicago Fed Letter

State and Local Government Public Pension Forum: A Conference Summary

Academic journal article Chicago Fed Letter

State and Local Government Public Pension Forum: A Conference Summary

Article excerpt

As growing numbers of their work force approach retirement age, state and local governments are taking a hard look at their pension funds to see if they are prepared for this exodus. This one-day conference brought together policymakers and experts to weigh the state of these funds.

Any strategy to fix pension shortfalls or reduce benefits must recognize the sensitivity many government employees have about their retirement benefits.

The future of state and local government public pension systems and related health care liabilities was the subject of a conference held at the Federal Reserve Bank of Chicago on February 28. The conference was cosponsored by the Bank, the Civic Federation, and the National Tax Association and brought together pension experts from law, accounting, and economics to discuss public pension dynamics and future liabilities.

Lance Weiss and Tim Phoenix from Deloitte Consulting began the program by discussing the influence that pension structure and benefits can have on recruiting and retaining talent in the public sector. While public sector leaders often recognize that an aging government work force is a significant issue, they are often at a loss on how best to manage pension obligations to meet the needs of both government employees and taxpayers. Public sector demographics suggest that a large portion of government workers are approaching retirement age, and this could lead to a significant talent gap. To manage this issue, Phoenix suggested governments look at their work force supply and demand strategies to ensure that they have the appropriate knowledge capital to meet their needs. The supply strategies include targeted strategies for improving attraction and recruitment, as well as realigning retirement and reward programs to retain and potentially extend the longevity of key employees. They also include better talent development programs and transferring knowledge from experienced workers before they retire, as well as investigating flexible employment options. On the demand side, various productivity enhancing strategies are key. These include expanding use of automation, investigating outsourcing, and providing self-service for customers.

Lance Weiss followed with an overview of pension fund dynamics. Weiss stressed that the public pension environment has changed radically, driven by new accounting requirements, such as Government Accounting Standards Board (GASB) No. 45, that force governments to recognize health care and other nonpension expenses and changing expectations for the role of the employer in providing retirement benefits. These nonpension expenses are referred to as "other post-employment benefits" (OPEB). The era of employer paternalism is being replaced by one of employee empowerment, with the risk of saving for retirement shifting to the employee. Weiss suggested that states have two basic options for addressing a pension funding shortfall. First, they can cut costs by reducing basic and/or ancillary plan benefits, or trim administrative expenses.

Second, they can increase investment returns or find alternative funding sources. They can defer costs by changing funding policies, changing actuarial assumptions or funding method, or changing the asset valuation method. Weiss stressed that deferral strategies will do little to address fundamental drivers of pension fund solvency. Weiss concluded that any strategy to fix pension shortfalls or reduce benefits must recognize the sensitivity many government employees have about their retirement benefits.

Richard Ciccarone of McDonnell Investment Management moderated a panel of major rating agencies. Ciccarone noted that, from the perspective of an institutional investor, the key questions in the public finance market are: Do the ratings provided by the rating agencies provide investors with sufficient warning of deteriorating financial condition? Second, do bond prices reflect the risk of the issuer? …

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