Summary of Findings for FY 2013 January 2015
 

About the Public Fund Survey

The Public Fund Survey is an online compendium of key characteristics of most of the nationís largest public retirement systems. The Survey is sponsored by the National Association of State Retirement Administrators. Keith Brainard maintains the Survey.

Beginning with fiscal year 2001, the Survey contains data on public retirement systems that provide pension and other benefits for 12.6 million active (working) members and 8.2 million annuitants (those receiving a regular benefit, including retirees, disabilitants and beneficiaries).  At the end of FY 13, systems in the Survey held assets of $2.86 trillion. The membership and assets of systems included in the Survey comprise approximately 85 percent of the entire state and local government retirement system community.

The primary source of Survey data is public retirement system annual financial reports. Data also is culled from actuarial valuations, benefits guides, system websites, and input from system representatives. The Survey is updated continuously as new information, particularly annual financial reports, becomes available. This report focuses on fiscal year 2013. Using graphs, this summary describes changes in selected elements of the survey.

Summary of Findings

Figure A plots the aggregate actuarial funding level among plans in the Survey since its inception in FY 2001. The funding level in FY 13 declined to 71.8 percent, down from 73.5 percent the prior year. The aggregate actuarial value of assets grew slightly, by 3.4 percent, from $2.65 trillion to $2.74 trillion. Liabilities grow primarily as active plan participants accrue retirement benefit service credits. This increase was outpaced by growth in the actuarial value of liabilities, from $3.60 trillion to $3.81 trillion, or 5.9 percent. The actuarial value of assets reflects the phasing-in, or smoothing, of investment gains and losses. Most plans either have completed, or are nearing completion, of recognition of the sharp investment losses incurred in 2008-09. Those losses are being offset by asset gains since the market decline.

Figure A

 

Figure B presents the aggregate actuarial funding level since 1990, measured by Standard & Poorís from 1990 to 2000 and the Survey since 2001. This figure illustrates the substantial effect investment returns have on a pension planís funding level: investment market performance was relatively strong during the 1990s, followed by two periods, from 2000-2002 and 2008-09, of sharp market declines.  Other factors that affect a planís funding level include contributions made relative to those that are required; changes in benefit levels; changes in actuarial assumptions, and rates of employee salary growth.

Figure B

The individual funding levels of the 126 plans in the Survey are depicted in Figure C. The size of each circle in the chart is roughly proportionate to the size of each planís actuarial liabilitiesólarger bubbles reflect larger plans and smaller bubbles reflect smaller plans. The median funding level is 72.8 percent, and the range is 25.8 percent to 134.3 percent.

Figure C

Figure D plots the median annual change among plans in the Survey in the actuarial value of assets and liabilities since FY 01. For a pension planís funding level to improve, its actuarial value of assets must grow faster than its liabilities. Liability growth remains notably lower, at a median rate of below 4.5 percent for four consecutive years. This lower rate of growth in liabilities is due to several factors, chiefly low salary growth and the many reforms (reductions) in pension benefits enacted in recent years. Tepid asset growth reflects the phased recognition (also known as actuarial smoothing of assets) of the sharp market declines experienced in 2008 and 2009. These losses now have been nearly or fully recognized, depending on the length of each planís smoothing period; the sharp increase in FY 13 is a preview of anticipated improvement in actuarial value of asset levels as the robust market gains since March 2009 are recognized (see Figure L).

Presenting the annual change in assets and liabilities based on median (midpoint) data, rather than aggregate (total), reduces the effects that very large plans and plans with extreme or exceptional results would have on the total. This method of presentation enables readers to focus on the experience of a typical plan instead of seeing results that could be skewed by the experience of a few outliers.

Figure D

The Survey measures two types of retirement system members: Actives and Annuitants. Actives are those who currently are working and earning retirement service credits. Annuitants are those who receive a regular benefit from a public retirement system; these are predominantly retired members, but also include those who receive a disability benefit, and survivors of retired members or disabilitants.

As shown in Figure E, the rate of increase in annuitants among systems in the Survey continued a pattern of annual growth of more than four percent. For the fifth consecutive year, the number of active members declined. This decline is consistent with US Census Bureau reports showing a reduction in the number of persons employed by state and local government, a trend Census data shows began in August 2008.

The difference between the continued increase in annuitants and a declining number of active members is driving a sustained reduction in the overall ratio of actives to annuitants. In FY 13, this ratio dropped to 1.55.

A low or declining ratio of actives to annuitants is not necessarily problematic for a public pension plan, because the typical public pension funding model features accumulation, during plan participantsí working years, of assets needed to fund retirement benefits.

When combined with an unfunded liability, however, a low or declining ratio of actives to annuitants can cause fiscal distress for a pension plan sponsor. An unfunded liability represents a shortfall in accumulated assets, and results in an increase to the required cost of the plan. A lower ratio of actives to annuitants results in costs to amortize a planís unfunded liability over a relatively smaller payroll base, which increases the cost of the plan as a percentage of employee payroll. Thus, although a declining active-annuitant ratio does not, by itself, pose an actuarial or financial problem, when combined with a poorly-funded plan, a low or declining ratio of actives to annuitants can result in relatively high required pension costs.

Figure E

On a market value basis, as of FY 13, systems in the Survey held a combined $2.86 trillion in assets. Figure F, which plots the fiscal year-end value of public pension funds in the Survey, reflects the result of market volatility in recent years, including the strong asset gains since 2009.

Figure F

Figure G plots the combined revenues and expenditures of the systems in the Public Fund Survey. The green line reflects investment gains and losses, which vacillate as investment markets fluctuate.  Blue bars indicate contributions, from employees and employers, and red bars show benefit payments. Contributions and investment earnings accrue to pension trust funds, established for the sole purpose of paying benefits and funding administrative costs. The benefits paid by public retirement systems are paid from trust funds; pension payments are not made from state and local government operating budgets or general funds.

Figure G

Figure H plots the distribution of changes in payroll over the three-year period from FY 10 to FY 13, among 113 plans in the survey for which this data is available. (The chart excludes plans in the Survey that are closed to new hires: the Alaska PERS and TRS, Michigan SERS, and three plans in Washington state.)

As the chart shows, the median change in payroll over this three-year period was 0.8 percent, although plansí experience covered a wide range, from a decline of 25 percent to an increase of 16 percent. (The plan with the 25 percent decline experienced the withdrawal of a large employer.) Two-thirds of these plans experienced total payroll growth over the three-year period of less than three percent, and the aggregate change during the period was a reduction of 0.9 percent. The decline in payroll reflects two basic factors: stagnant or declining employment levels, combined with modest salary growth among employees of state and local government. Information provided by the U.S. Bureau of Labor Statistics indicates that annual growth in wages and salaries for employees of state and local government has remained around one percent since mid-2009. BLS data suggest that wage growth for public workers has increased at a higher rate since FY 13.

Figure H

Figure I plots median external cash flow since FY 01. External cash flow is the difference between a systemís revenue from contributions, and payouts for benefits and administrative expenses. Dividing a systemís cash flow into the value of the systemís assets produces a measure of cash flow as a percentage of assets, which is shown in Figure H. A growing number of annuitants, combined with a low or negative rate of growth in active members will result in a reduction in a retirement systemís external cash flow. Conversely, a growing asset base will offset a rate of negative cash flow.

A negative cash flow is not, by itself, an indication of financial or actuarial distress. Nearly all systems in the survey have an external cash flow that is negative, meaning they pay out each year more than they collect in contributions. A lower (more negative) cash flow may require the systemís assets to be managed more conservatively, with a larger allocation to more liquid assets in order to meet current benefit payroll requirements.

Figure I

 

Figure J illustrates the changes over time in two measures pertaining to the Annual Required Contribution (ARC): the average ARC received by all plans in the Survey; and the percentage of plans that received at least 90 percent of their ARC. The investment market losses of 2008-09 increased public pensionsí unfunded liabilities, resulting in higher costs to amortize those liabilities. Meanwhile, the Great Recession decimated state and local government revenues, an experience from which most plan sponsors continue to recover.

Implementing higher contributions, from employees and employers, takes time. The effect of factors that change contribution rates, such as investment losses, must first be measured through an actuarial valuation; then a legislature or other governing body must approve new rates. This cycle, from actuarial event to implementation of higher contribution rates, can take several years. Figure J indicates that efforts to fund public pensions are improving after a period of declining ARC effort during and after the Great Recession.

Figure J

 

As shown in Figure K, the median investment return for plans with a FY-end date of June 30, 2013 (used by approximately three-fourths of the funds in the survey), was 12.0 percent; the return for plans whose fiscal year-end coincides with the calendar year was 16.1 percent.

Returns for longer periods are mostly strong, with the exception of the five-year period ended 6/30/13, which includes the sharp market decline of July 2008 to March 2009. Notably, for longer periods, particularly 20+ years, median public pension fund returns are consistent with or greater than the investment return assumptions used by most plans.

Figure K

Of all actuarial assumptions, a public pension planís investment return assumption has the greatest projected effect on the long-term cost of the plan. This is because a majority of revenues of a typical public pension fund come from investment earnings. Even a minor change in a planís investment return assumption can impose a disproportionate impact on a planís funding level and cost.

For most of the Public Fund Surveyís measurement period, the median investment return assumption used by public pension plans was 8.0 percent. Since 2009, a majority of plans have reduced their investment return assumption, resulting in a reduction to the median to 7.75 percent.  Figure L compares the distribution of investment return assumptions since the inception of the Survey through FY 13. Figure L illustrates the steady reduction in assumed rates of return, particularly since 2009.

Figure L

Figure M plots the average asset allocation of 96 funds in the Public Fund Survey since its inception. For the first time in several years, the average allocation to equities grew, to just above 50 percent, while Fixed Income declined to below 24 percent, its lowest allocation ever. Real Estate continued to increase, now above 7 percent, while allocations to Alternatives, which is composed primarily of private equity and hedge funds, held steady at around 15 percent.

Figure M

 

Appendix A and B are accessible via the Report Selection page to registered users of the Public Survey. Access these appendices by logging in via the User Login page.

  • Appendix A presents a listing of systems in the survey, including their market value of assets and membership counts.
  • Appendix B presents a listing of plans in the survey, including their actuarial value of assets and liabilities and funding levels.