State & Local Government DB Plans Alan Auerbach November 15, 2019 - - PowerPoint PPT Presentation

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State & Local Government DB Plans Alan Auerbach November 15, 2019 - - PowerPoint PPT Presentation

Jul 10, 2023 129 likes •293 views

State & Local Government DB Plans Alan Auerbach November 15, 2019 Major Subnational Fiscal Issue State and Local governments face serious restrictions on their ability to run deficits and accumulate debt Balanced budget requirements

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State & Local Government DB Plans

Alan Auerbach November 15, 2019

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Major Subnational Fiscal Issue

  • State and Local governments face serious

restrictions on their ability to run deficits and accumulate debt

– Balanced budget requirements varying in strength – Borrowing typically limited to short‐term smoothing and capital projects

  • But implicit liabilities are excluded from these

restrictions

– Has encouraged a shift in form of compensation, exacerbated by the agency problem

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Claims to benefits accrued

Relative to wages and salaries, state & local government

11/14/2019 3

0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 1997 2002 2007 2012 2017 2022

Nevada U.S. Indiana

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Considerable Recent Attention

  • In the scholarly literature (e.g. Novy‐Marx and

Rauh, JEP, 2009) as well as in the popular press about state and local fiscal pressures

  • Various assumptions required to estimate

value of unfunded liabilities

– Perhaps the most important is the chosen discount rate – Basic principles of finance suggest use of a rate of return on fairly certain obligations, but this is generally not the practice

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Pension plans’ discount rates

2000 2018 6.50 or less 1 20 6.51 to 7.00 3 47 7.01 to 7.50 15 95 7.51 to 8.00 63 19 8.01 to 8.50 33 8.51 or more 5 Liability-weighted average 7.99 7.05 Number of pension plans 120 181

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Discount rates

1 2 3 4 5 6 7 8 9 1997 2002 2007 2012 2017 2022

Percent

BEA FTSE AAA Corporate Bonds

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Implications

  • With a reasonable discount rate, state and

local plans are severely underfunded

  • The condition has generally worsened as the

discount rate has fallen

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Funded ratio

Pension fund assets relative to benefit entitlements

0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1997 2002 2007 2012 2017 2022

Wisconsin U.S. Illinois

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Interpreting the Accounts

  • Accrual accounts structured to balance

receipts and expenditures

  • But the balance is provided by residual

imputations of

– Employer contributions to meet new accruals – Interest on existing claims to keep up with their growing value

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Line 2015 2016 2017 2018 1 Current receipts, accrual basis 680.1 719.8 766.3 780.4 2 Output1 13.6 14.9 16.8 18.6 3 Contributions 442.1 463.6 486.4 493.8 4 Claims to benefits accrued through service to employers 217.8 222.2 223.3 225.9 5 Actual employer contributions 134.1 139.9 151.1 166.9 6 Imputed employer contributions 48.0 43.4 32.1 19.0 7 Actual household contributions 49.3 53.8 56.8 58.7 8 Less: Pension service charges1 13.6 14.9 16.8 18.6 9 Household pension contribution supplements2 224.3 241.4 263.1 267.9 10 Income receipts on assets (including plans' claims on employers) 224.3 241.4 263.1 267.9 11 Interest 193.0 208.0 223.4 225.0 12 Monetary interest 43.2 44.1 53.6 62.2 13 Imputed interest on plans' claims on employers3 149.8 163.9 169.8 162.8 14 Dividends 31.4 33.4 39.6 43.0 15 Current expenditures, accrual basis 680.1 719.8 766.3 780.4

Table 7.24. Transactions of State and Local Government Defined Benefit Pension Plans

[Billions of dollars] Last Revised on: July 30, 2019

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Line 2015 2016 2017 2018 1 Current receipts, accrual basis 680.1 719.8 766.3 780.4 2 Output1 13.6 14.9 16.8 18.6 3 Contributions 442.1 463.6 486.4 493.8 4 Claims to benefits accrued through service to employers 217.8 222.2 223.3 225.9 5 Actual employer contributions 134.1 139.9 151.1 166.9 6 Imputed employer contributions 48.0 43.4 32.1 19.0 7 Actual household contributions 49.3 53.8 56.8 58.7 8 Less: Pension service charges1 13.6 14.9 16.8 18.6 9 Household pension contribution supplements2 224.3 241.4 263.1 267.9 10 Income receipts on assets (including plans' claims on employers) 224.3 241.4 263.1 267.9 11 Interest 193.0 208.0 223.4 225.0 12 Monetary interest 43.2 44.1 53.6 62.2 13 Imputed interest on plans' claims on employers3 149.8 163.9 169.8 162.8 14 Dividends 31.4 33.4 39.6 43.0 15 Current expenditures, accrual basis 680.1 719.8 766.3 780.4

Table 7.24. Transactions of State and Local Government Defined Benefit Pension Plans

[Billions of dollars] Last Revised on: July 30, 2019

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Line 2015 2016 2017 2018 1 Current receipts, accrual basis 680.1 719.8 766.3 780.4 2 Output1 13.6 14.9 16.8 18.6 3 Contributions 442.1 463.6 486.4 493.8 4 Claims to benefits accrued through service to employers 217.8 222.2 223.3 225.9 5 Actual employer contributions 134.1 139.9 151.1 166.9 6 Imputed employer contributions 48.0 43.4 32.1 19.0 7 Actual household contributions 49.3 53.8 56.8 58.7 8 Less: Pension service charges1 13.6 14.9 16.8 18.6 9 Household pension contribution supplements2 224.3 241.4 263.1 267.9 10 Income receipts on assets (including plans' claims on employers) 224.3 241.4 263.1 267.9 11 Interest 193.0 208.0 223.4 225.0 12 Monetary interest 43.2 44.1 53.6 62.2 13 Imputed interest on plans' claims on employers3 149.8 163.9 169.8 162.8 14 Dividends 31.4 33.4 39.6 43.0 15 Current expenditures, accrual basis 680.1 719.8 766.3 780.4

Table 7.24. Transactions of State and Local Government Defined Benefit Pension Plans

[Billions of dollars] Last Revised on: July 30, 2019

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Line 2015 2016 2017 2018 1 Current receipts, accrual basis 278.8 272.1 255.1 282.7 2 Output1 12.8 13.9 14.3 15.3 3 Contributions 167.6 162.6 154.1 166.7 4 Claims to benefits accrued through service to employers 69.2 67.1 67.5 65.9 5 Actual employer contributions 106.0 124.1 143.4 179.4 6 Imputed employer contributions ‐24.9 ‐43.9 ‐62.5 ‐99.1 7 Actual household contributions 0.9 0.7 0.9 0.9 8 Less: Pension service charges1 12.8 13.9 14.3 15.3 9 Household pension contribution supplements2 98.4 95.5 86.7 100.8 10 Income receipts on assets (including plans' claims on employers) 98.4 95.5 86.7 100.8 11 Interest 64.6 61.6 52.6 66.9 12 Monetary interest 38.3 36.9 36.5 41.4 13 Imputed interest on plans' claims on employers3 26.2 24.8 16.2 25.5 14 Dividends 33.8 33.9 34.0 33.9 15 Current expenditures, accrual basis 278.8 272.1 255.1 282.7

Table 7.22. Transactions of Private Defined Benefit Pension Plans

[Billions of dollars] Last Revised on: July 30, 2019

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New Results by State

  • Breakdown very helpful, since considerable

heterogeneity with respect to levels and trajectories

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Funded ratio

Pension fund assets relative to benefit entitlements

11/14/2019 15

0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 1997 2002 2007 2012 2017 2022

West Virginia Illinois