Government Finance Officers Association

Government Finance Review, August 2001 | Go to article overview

Government Finance Officers Association


Publications reviewed in this section are new acquisitions of the Government Finance Officers Association (GFOA). Government Finance Review publishes with each citation the name and address of the publisher/distributor. Requests for copies should be addressed to the publisher/distributor, not to GFOA.

Pensions in the Public Sector

Mitchell, Olivia S. and Hustead, Edwin C. (editors)

Philadelphia, PA: University of Pennsylvania Press 2000, 393 pp

Reviewed by Laura Palmer Werneck, Policy Analyst, GFOA Research and Consulting Center, Chicago, Illinois.

Pensions in the Public Sector is a useful guide to government pension planning and administration. Readers, however, need to be patient with the book's organization. Written by multiple authors, this book contains some repetition, different writing styles, and ordering discrepancies. Nonetheless, Pensions in the Public Sector is required reading for pension system managers and policymakers.

Chapters 1 and 2 begin by defining the differences between defined benefit (DB) and defined contribution (DC) plans and by discussing trends in the workplace and challenges that place pressure on governments to switch from defined benefit to defined contribution plans. For instance, the workforce is aging and becoming more mobile. Also discussed are the actuarial valuations and assumptions employers use to measure plan obligations and determine contributions necessary to fund these liabilities over time.

Chapter 3 is especially important for new public managers or students of public finance interested in state pensions. It educates readers on the similarities and differences of public and private plans and the legal basis for, and benefits of, pensions. Most notably, it points out that because special interest groups (such as retirees or workers) influencing legislation have a strong effect on the pension plan designs, public pensions tend to be more employee-oriented, rather than employer-oriented. As a result, funding problems arise. Small adjustments to benefits in the present can result in significantly higher costs in the long run as the benefits are paid out to employees in the future. Politicians concerned with short-term budgets of their office term often overlook this dilemma. This chapter then continues the discussion on how to set actuarial assumptions in order to accurately predict how much money is enough to fund the pension system.

Chapters 4 and 5 focus on federal civilian and military retirement systems and the Canadian public-sector pension plans. Continuing the historical account of pensions, chapter six explains how federal influence on pensions has increased over time. Pensions originally were created by public and private organizations in order to recruit and retain valuable employees, exhibit social responsibility, and respond to pressures from economic competition and organized labor demands. Federal mandates did not exist at this point. The Employment Retirement Income Security Act (ERISA) of 1974 was the first time government focused on private employer-provided plans, according to the authors. Although this act applied to private plans only, it indirectly influenced public plans. For example, public plans adopted prudent standards similar to those established by ERISA.

Chapter 7 explains how state and local retirement systems are structured and how they are changing to make oversight boards more accountable and investing more aggressively to receive higher returns. Working under fewer constitutional constraints, boards are involved in investment allocation and commonly use independent appraisals of their investment performance. By allowing trustees to make investment decisions, plans are more shielded from "momentary political winds" that might be great for states or municipalities, yet bad for beneficiaries. Furthermore, trustees, because they are "closer to the action," or are more knowledgeable on investment options, are better able to make sound decisions. …

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