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NCPERS Delivers 10 Constructive Approaches to Closing Public Pension Funding Gaps
It's all hopeless. That seems to be the attitude of critics of public pensions whenever a funding gap occurs.
File that ill-informed comment right next to “How did this happen?” (The answer to the latter question is usually a no-brainer. Although there are a number of possible reasons, far too often it's very simple. A shortfall developed after a government withheld its payments to the pension fund while cheerfully requiring workers to keep forking over their share. No one should act surprised when a gap develops in such a case.)
NCPERS Delivers 10 Constructive Approaches to Closing Public Pension Funding Gaps
It's all hopeless. That seems to be the attitude of critics of public pensions whenever a funding gap occurs.
File that ill-informed comment right next to “How did this happen?” (The answer to the latter question is usually a no-brainer. Although there are a number of possible reasons, far too often it's very simple. A shortfall developed after a government withheld its payments to the pension fund while cheerfully requiring workers to keep forking over their share. No one should act surprised when a gap develops in such a case.)
The fact is, there are plenty of things we can do to address funding gaps in public pension plans. The idea that we can't is both helpless and defeatist thinking. Simplistic solutions such as throwing up our hands and shutting down the plan are far too drastic, and underscore how poorly many lawmakers understand how pensions work and why they are provided in the first place.
A new research paper from NCPERS, “Ten Ways to Close Public Pension Funding Gaps,” offers practical, common-sense solutions to counteract ill-advised quick fixes. The paper describes alternative approaches that public pension systems and their government relations team should consider, understand, and bring up in discussions, debates, and negotiations.
We at NCPERS believe that long-term pension funding should be aligned with the long-term economic capacity of state and local governments. We reject the idea that long-term pension policy should reflect short-term fiscal tactics. We also believe that fiscal policy should encourage behaviors that are ultimately in the best interests of our states and localities, including having the right incentives in place to support the delivery of critical public services—and removing disincentives.
As the paper notes, the ultimate way to close public pension funding gaps is by reforming revenue systems and closing tax loopholes. But that is admittedly a long road, and it's not something pension trustees and administrators can control.
There are, however, some areas where trustees and administrators have influence, control or both. As the title indicates the paper advances 10 ideas. They include a new approach to limited pension obligations bonds and building on recently adopted emergency programs of the Federal Reserve System to buy underperforming assets.
And the list goes on. Other options include establishing bridge loans to increase liquidity; securitizing public assets; creating dedicated revenue stream, adopting a pension stabilization fund; mandating monthly employer contributions; exploring consolidation; exploring auto-triggers, in which employer and employee contributions to the plan are adjusted based on investment returns and changes in life expectancy; and reforming revenue systems and closing tax loopholes.
State and local public pensions vary in design and financial condition, and as a result there is no one-size-fits-all solution when a gap occurs. But there are ideas and approaches which every public pension system should become familiar with. The paper is a jumping-off point for public pension systems, providing the ideas and tools pensions need to be positive, creative and constructive when facing financing shortfalls.
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