States, Localities Shoring up State Pension Plans

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<h3>James A. Klotz</h3>

James A. Klotz

State and local governments are pouring money into state pension plans at a level not seen in decades.

The median percentage of the actuarially determined contribution received in fiscal 2021 was 100%.

“This marks the highest percent of ADC received since fiscal year 2001 and the seventh consecutive year in which the aggregate ADC experience was higher than 90%,” the National Association of State Retirement Administrators said in a report.

States Shoring Up Their Pension Plans

Pension policies updated in wake of recession

Many public pension plans changed their funding policies following the recession of 2007-2009 and the market decline of 2008-2009, the group said, resulting in an increase in required contributions.

“Such changes include implementation of more aggressive funding policies; lower investment return assumptions; updated mortality assumptions; and reduced amortization periods.”

The report said more public employers established dedicated public pension funding sources to supplement or replace other sources of funding for employer contributions to public pensions, such as employers’ general fund.

Dedicated funding sources now include dedicated sales taxes, insurance policy surcharges, budget surplus funds and others.

A “notable” source of dedicated funding, the group said, was in New Jersey, which in 2017 transferred rights to all revenue generated by the state lottery to the state pension plans.

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    “We’ve seen what can only be characterized as a surge in state and local contributions starting in 2014 or 2015,” said Keith Brainard, of NASRA, according to The Bond Buyer.

    “We’ve been impressed by the magnitude of the effort to improvement contributions, especially among states that have had a lot of trouble doing so in recent years.”

    Encouraging signs

    Government pension plans have often been cited as a cloud hanging over the fiscal health of states. While we encourage continued vigilance, we are heartened by this report and the efforts of states over many years to directly address their potential shortcomings.

    Last year we reported on the rise in state revenues following the onset of the Covid-19 pandemic. Bucking the darkest prognostications of some commentators, revenue for most states bounced back and is strong (“State Revenues on Upswing”).

    A few months ago we noted the robust balance sheets of state and local governments and the favorable levels of states’ rainy day funds (“The Ballast Behind the Muni Market”).

    Conditions change and it’s always important to continuously monitor the fiscal health of all issuers.

    But these improved conditions speak to the various tools available to public issuers in shoring up their finances, the central tenet of why investors rely on municipal bonds to help them sleep peacefully at night.

    James A. Klotz is the President of FMSbonds, Inc.
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    Jan 25, 2023

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