NCPERS Proposes a New Tool to Make Public Pension Plans Fiscally Sustainable

Public pensions can be made and kept sustainable for the long haul by incorporating a new tool— sustainability valuation—into funding policies and practices, according to a new study by the National Conference on Public Employee Retirement Systems.

“We are reframing the conversation about unfunded liabilities by grounding it in a deeper understanding of the relationship between pension funds and local and state economies.”

Pension systems can use sustainability valuation to monitor their fiscal status on a continuing basis, gaining insights that would enable them to identify fiscal adjustments needed to stabilize pensions long-term, the study found. The study by Michael Kahn, NCPERS director of research, delineates how sustainability valuation can be applied in a range of areas, including actuarial valuation, plan sponsors’ funding discipline, and sound investment policies.

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“At a time when discussions about public pensions tend to be politically charged, NCPERS is committed to developing solutions through strong research and analysis,” said Hank Kim, executive director and counsel of NCPERS. “We are reframing the conversation about unfunded liabilities by grounding it in a deeper understanding of the relationship between pension funds and local and state economies.”

The study, “Enhancing Sustainability of Public Pensions,” shows that if unfunded liabilities were about 3 percent or $141 billion lower than their 2018 level (the latest year for which data are available), they would have been positioned to continue paying benefits without fiscal interruption.

Previous NCPERS research has demonstrated that maintaining a stable ratio between unfunded liabilities and the economy is more important to a plan’s sustainability and ability to pay benefits than focusing on unfunded liabilities and funding levels in isolation. The new study builds on that finding by devising the sustainability valuation approach—a method of monitoring sustainability on an ongoing basis and making fiscal adjustments to keep the ratio between unfunded liabilities and economic capacity stable at a specific level.

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Kahn said that the study’s analysis confronts a fundamental error that critics of public pensions make. They frequently compare pension liabilities that are amortized over 30 years with one-year state and local economic capacity or revenues. This erroneous mismatch is then cited as justification for extreme measures, such as cutting benefits and shutting down pension plans, he noted.

“For years, opponents of public pensions have been locked in an extraordinary game of one-upmanship to come up with the most shocking unfunded liabilities number, ” Kahn says. “The real number to watch is the amount of money needed to make and keep a pension plan fiscally sustainable. The more sustainable pension plans are, the better funded they are. Similarly, the sustainable pension plans have lower contribution rates.”

The study, which is available on the NCPERS website, totals 90 pages. It includes a state-by-state analysis of outstanding debt and unfunded pension liabilities.

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