National Conference on Public Employee Retirement Systems

The Voice for Public Pensions


Public Pension Oversimplification Can Complicate Things Quickly

By: Daniel J. Siblik, ASA, MAAA, FCA, EA, Segal
Public pension plans are often lumped together for analysis that tends to oversimplify the overall picture of the uniqueness of the plans that reside within the groupings, whether at a national level or a state level. Daniel Siblik with Segal discusses how each plan has its own varied features that are the basis for its current situation, as well as its future outlook, and should be considered individually.
Public Pension Oversimplification Can Complicate Things Quickly
This is an excerpt from NCPERS Winter 2024 issue of PERSist, originally published January 16, 2024.
It's not breaking news that some journalists use a “hot take” approach when covering public pensions to create a splashy summary that glosses over details and roughly hits whatever mark is aimed at.

Public pension plans are frequently lumped together, often at a national level. They may also be broken out by state, but even that can be somewhat inaccurate. As a result, many plans get painted negatively with a broad brush.

For example, a Google search for “public pension plans time bomb” might yield results like these:
  • “Time Bomb of Public Pension Funding Ticks Louder” (Bloomberg)
  • “US Pension Plans Are on the Brink of Implosion – And Wall Street Is Ignoring It” (The Guardian)
  • “Ticking Time Bomb: The Impending Collapse of The Pension System” (Epicenter) Oh no worries, this one is only about Europe.

Aggregation at a State Level

Pew Charitable Trusts summarizes plans and gives total liabilities, assets and resulting funded percentages (assets over liabilities) by state. Overall, Pew shows states ranging from 44% to 119% funded for 2021 (the most recent year summarized).

For some states, many plans are summed. For others, just one. A state may have a funded percentage of 80% but contain nine individual plans ranging from 25% to 101%. The overall average of 80% is a weighted average, but still paints an overly simplistic picture.

Pew data includes 230 individual plans ranging from 0% to approximately 200% funded. The median plan count by state is five plans. Teacher and education plans are often the largest by liability and judicial and legislative plans are often smallest.

Some states have large public plans that are not included in these analyses. Illinois, for example, has five plans in the Pew summary averaging 44% funded and resides at the bottom of the rankings. Total liabilities for these five plans are approximately $250 billion, but there is another plan in the state with over $50 billion in liability covering a population of approximately 500,000 that is 98% funded: The Illinois Municipal Retirement Fund, which does not receive money from the state of Illinois.

Plan Considerations

In contrast to private pension plans that largely reside under the national umbrella of ERISA, resulting in them having the same basic rules, public pension plans operate within the governance structure of individual states. So, for these plans, we are basically looking at 50 mini-nations. A plan in California has different statutes affecting benefits and funding than one in Tennessee. Some Native American plans may be governed by tribal law. Naturally, this causes significant variance among plans. Plans in different states have distinct provisions, assumptions, funding policies, contribution structures and history — basically, their own stories on how they got where they are and where they are headed.
Because public plans operate so differently from one another based on state laws and regulations, they need to be considered at a more granular level, not always treated as a single state metric. Lumping them together can result in a one-size-fits-all approach to “fixing” them when they have different strengths and weaknesses. Within a particular state, there are often large pension plans funded much better than the overall ratio of all plans.
Below is a non-exhaustive list of some of key features that vary from plan to plan. These items affect aspects of plans like benefit levels, governance, funding, future plan health and plan costs.

While some clearly (and unfortunately) see the public pension plan system collectively as being on borrowed time, most plans have paid benefits for decades (or more) and never missed a benefit payment. Each plan's individual underlying structure, assumptions and other features can provide insight into the health and funding trajectory of the plan.

Why Each Public Plan Should be Analyzed Individually

Each plan is unique, and decisions stakeholders make affecting a plan's future health should be understood. Clustering them can be reckless and misleading on all fronts. As a collective group of plans improves funding in certain years, other plans that lose ground and maintain short-sighted policies should also not get to hide under that umbrella.

It's important to read articles about “public pension plan funding” critically and draw your own conclusion based on data for individual plans.
About the Author: Daniel J. Siblik, ASA, MAAA, FCA, EA is a Vice President and Actuary in Segal's Chicago office. Dan has more than 25 years of experience as a benefits consultant. He has spoken at actuarial conferences and participated in organized pension trustee training forums. He focuses on public sector pension consulting.




There have been no comments made on this article. Why not be the first and add your own comment using the form below.

Leave a comment

Please complete the form below to submit a comment on this article. A valid email address is required to submit a comment though it will not be displayed on the site.

HTML has been disabled but if you wish to add any hyperlinks or text formatting you can use any of the following codes: [B]bold text[/B], [I]italic text[/I], [U]underlined text[/U], [S]strike through text[/S], [URL][/URL], [URL=http//]your text[/URL]