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NIRS Study Delves Into Pension Funding Strategies as States Work to Keep Funds Flowing
The NIRS report, Beyond the ARC: Innovative Funding Strategies from the Public Sector, highlights case studies from California, Colorado, Indiana, Kentucky, Louisiana, Maine, Montana, New York, North Carolina, Oklahoma, Oregon, Pennsylvania and West Virginia.
NIRS Study Delves Into Pension Funding Strategies as States Work to Keep Funds Flowing
The Covid-19 pandemic has raised concerns that public pension shortfalls may develop or increase as state and local governments cope with unusual economic instability. A new report from the National Institute on Retirement Security examines strategies that 13 jurisdictions have explored to keep funds flowing to their public pensions.
The NIRS report, Beyond the ARC: Innovative Funding Strategies from the Public Sector, highlights case studies from California, Colorado, Indiana, Kentucky, Louisiana, Maine, Montana, New York, North Carolina, Oklahoma, Oregon, Pennsylvania and West Virginia. While investment markets and public pension funds have generally been resilient amid the Covid-19 fallout, the debate over funding levels could be renewed, the report said. The case studies should serve as a tool for policy markets and stakeholders as they search for strategies to address funding challenges, NIRS said.
The plans highlighted in the report use a variety of funding strategies. They include separate funding strategies for existing liabilities and on-going plan costs; employer side accounts; pension obligation bonds; withdrawal liabilities; and dedicated revenue streams from sources like sports betting.
NIRS Executive Director Dan Doonan said pension systems could face a push by cash-strapped state and local governments to reduce their actuarially determined contribution (ADC) to plans. Less funding could be particularly problematic for the handful of funds that were already inadequately funded because of past funding missteps, Doonan said.
For example, the report looked at efforts in four states—California, New York, Oregon and Pennsylvania—to give local employers greater control over state-run plans through the use of side accounts. These efforts generally allow employers to pre-pay pension contributions into side accounts to reduce their future costs. Those contributions are then managed for the employer, and various methods are used to determine how future costs will be reduced by these credits.
One section of the report examines how plan sponsors can maintain a disciplined funding policy by dedicating a specific source of revenues to pension funds. For example, it describes how casinos and lotteries are being used to keep pension funds at a healthy level in Illinois, including the city of Chicago, Kansas, Oklahoma, Oregon, and New Jersey. It also provides case studies on how Montana uses revenue from its coal severance tax to pay down the state's unfunded pension liabilities, and how West Virginia used its tobacco settlement money to make a large lump sum payment to jumpstart pension funding.
Other sections of the report include how to implement a withdrawal liability to protect the sustainability of plans; review the potential benefits of pension obligation bonds; and explore separate funding strategies for legacy costs and ongoing plans.
“Given the potential for renewed funding debates, these case studies can serve as a tool for policymakers and stakeholders interested in exploring funding strategies that have been utilized to address funding challenges,” NIRS said. “These case studies illustrate how different goals were achieved and can help frame funding policy discussions. And, these funding strategies could serve as a model to craft customized funding goals and strategies for pension plans facing similar obstacles.”
You may also be interested in: NCPERS Delivers 10 Constructive Approaches to Closing Public Pension Funding Gaps, NIRS Report: Rising Risks and Costs Threaten Americans' Retirement Security.
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