Government Budgeting: A Practical Guidebook by George M. Guess

Author:George M. Guess [Guess, George M.]
Language: eng
Format: epub
Tags: Public Policy, Public Affairs & Administration, Political Science, Business & Economics, Management, General
ISBN: 9781438456683
Google: -BHbCQAAQBAJ
Goodreads: 26760387
Publisher: SUNY Press
Published: 2015-06-01T00:00:00+00:00

There are two kinds of plan structures. Defined benefit (DB) plans specify retirement benefits to be collected in the future. Eighty-four percent of all state and local government employees have access to DB plans. Specified retirement benefits often include cost-of-living adjustments (COLAs). By contrast, defined contribution plans (DC) accumulate funds for employees and upon retirement the employee draws on the invested assets and bears the risk as to what their level will be (Listokin-Smith, 2012, p. 845; Finkler, 2010, p. 531). As noted above, only three states have mandatory DC plans. Public employee retirement systems also offer more than income, for instance, supplemental health coverage to Medicare, prescription drug coverage, dental and vision coverage, and life and disability insurance. Over the past twenty years, private sector firms have decreased access to DB plans from 32 percent to 21 percent (2012, p. 845).

In the United States, pension benefits are considered an accrued obligation to be paid out of current budgets, usually from fiduciary or trust funds. Benefits can be paid in one of two ways: (1) “Pay-as-you-go” from appropriations by the employer when benefits come due, or (2) “Reserve funding” from accumulated investment income used to defray a portion of required contributions. The second approach can be more financially secure and provide more equitable treatment of different generations of employees and taxpayers by assigning plan costs more closely to the years in which benefits were earned (Zorn, 1991, p. 377).

Pension funds (whether managed by government units or private financial investment firms hired by governments) invest their monies in government and corporate bonds, bank certificates of deposit, money market funds, and other investments. The intent is to make a reasonable return so that planned retirement benefits can be paid without incurring inordinate risk to the funds or, in the worst case, state or local budgets. Pension assets then represent government payables or liabilities. In at least twenty states, a portion of pension funds is earmarked for business investment. The pension fund either loans the money to the potential investor or exchanges it for an equity position in the firm (Fischer, 2007, p. 649). States and localities then have important economic incentives to ensure that pension funds maintain their value and grow. Referring back to the chapter 1 framework, two important indicators of financial condition in this area are: (1) the ratio of unfunded pension plan vested benefits to assessed valuation, and (2) pension plan assets to pension benefits paid (Valente & Valente, ICMA in Lewis & Walker, 1984, p. 309).

To increase the value of pension reserve funds, starting in the 1980s, investments shifted out of fixed-income securities and diversified into private equity, hedge funds, and alternative investments. Assets grew from $1.1t in 1995 to $3.2t in 2008. As investment policies shifted, assumed rates of return also increased. The alternative investments provided higher returns but also much higher risks. Losses in pension fund assets in 2007–08 amounted to $1t (Listokin-Smith, 2012, p. 851). Based on actuarial assumptions, the pension funding ratio was 80.9 percent in 2009 (others put it at 78%).

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