Local government retirement funds

This page is about pension and health benefit plans managed by US local government entities, mainly cities and counties. The main question is whether the condition of local plans is sufficiently similar to that of state plans to justify the usual lumping together of state and local.


18 Nov 2010.

Most studies of unfunded state and local government retirement obligations concentrate on state plans, sometimes including a small representative sample of local plans. This is necessary because, as of the 2008 Census Bureau inventory, there were 2332 local government pension plans, and it is more than challenging to track down data on all of them.

Local plans, though numerous, claim only 10% of the combined state and local pension plan members, and 16% of assets. As a consequence, it suffices to have a detailed knowledge of the condition of state plans, and a more cursory knowledge of local plans. Most studies simply assume that local plans are more or less in the same condition as state plans. Is this assumption justified?

For pensions, the overall condition of local plans does indeed seem to be very similar to that of state plans. A 2008 Boston College study, using 2006 data, looked at 84 local government plans across 38 states, covering about 58% of local plan assets. For plans providing data on unfunded obligations, this study found an average funding ratio of 85%, compared to 84% for state plans. To bring contributions for all 84 of the local plan contributions up to the level of the Actuarial Required Contribution would have required an adjustment, in aggregate, of 1.6% of payroll, compared to 1.8% for state plans. (Note: that was before the crash; the numbers are worse now.)

A 2010 study by Rauh and Novy-Marx, extrapolating from 77 of the largest local plans, found that the unfunded pension liability at the local level was, as a percentage of revenue, almost precisely the same as that for the states.

There is much less data on retirement health care obligations. One Government Accountability Office study of retirement health care benefits, including all state plans and 39 large local government plans, found that the unfunded liability of the local plans was $129 billion, 24% of the combined $530 billion for both state and local. These 39 plans probably covered less than half of all local government plan members. If we double the $129, just to get a rough idea of what the total might be for all local plans, this would bring the local amount to about 30% of the combined total unfunded obligations. Given that local pension plans only have 10% of combined state and local pension plan members, this suggests that local retirement health care plans are in considerably worse shape than state plans.

This conclusion is supported by data on at least one state. In a study of all New York health care retirement plans, the two state plans had, together, unfunded liabilities of $60 billion, while all local plans had, in aggregate, unfunded liabilities of $145 billion – almost two and a half times greater. In contrast, Census data show that in 2008 state pension plans had assets of $277 billion and local pension plans had assets of $116 billion, suggesting that, as in most states, the state plans have far more members.


  • The only comprehensive inventory of local plans is the Census of Governments, but the Census does not cover liabilities
  • Many comprehensive studies of state plans also cover a small, hopefully representative, sample of local plans.
  • Rauh and the Boston Center for Retirement Studies have each covered a more representative sample of local government pension plans
  • A GAO study on unfunded retirement obligations covered a representative sample of local plans

See also

Clippings below were used in the construction of this page

(covered through 18 Oct 2010)

On Census coverage of state and local plans

Mar 2008. Center for Retirement Research Boston College.

“WHAT DO WE KNOW ABOUT THE UNIVERSE OF STATE AND LOCAL PLANS? By Alicia H. Munnell, Kelly Haverstick, Mauricio Soto, and Jean-Pierre Aubry*”

“The Census of Governments is the only source that reports on the entire universe of state administered plans, in addition to more than 2,000 locally administered plans. …

A Census of Governments is undertaken at five-year intervals. The Census includes a volume on Employ- ee-Retirement Systems of State and Local Governments, which provides data on revenues, benefit payments, assets, holdings and membership of the employee retirement systems. The strength of this publication is that it identifies 2,670 retirement systems that are sponsored by a government entity. This information on a vast universe of plans is the only way to assess the extent to which surveys are representative and to calculate the proportion of assets and membership covered by the surveys. Because the Census contains no data on pension liabilities, it is not possible to determine the funding status of plans. Nevertheless, the Census data provide a useful overview of the retirement landscape in the public sector. …

The state systems usually cover general state government employees and teachers; locally-administered systems often cover police and fire as well as general municipal employees. But the structure varies enormously. Some states (Maine and Hawaii) have a single system covering all types of employees, while other states (Florida, Illinois, Michigan, Minnesota and Pennsylvania) have over a hundred systems.

The stylized fact that emerges from the data is that state-administered plans account for a tiny fraction of the plans but almost all the participants and assets. Specifically, state-administered plans account for only 8 percent of total plans, but 88 percent of the active members and 82 percent of assets. …

While local plans on average tend to be small, they hold substantially more assets per active employee than state-administered plans. The most likely explanation is that these plans often cover police and firefighters, who have physically demanding jobs and are allowed to retire at earlier ages and require more extensive disability protection.”

[Note the Census of Governments only covers pension plans, not retirement health care plans.]

Participating local governments set own Calpers benefits, and some set them too high

19 Dec 2008.

“Calpers Losses Add to a City's Stress. By RHONDA L. RUNDLE”

“In recent years, Pacific Grove has seen its annual pension costs soar, largely because of increased contributions to make up for losses caused by the last market downturn. … Calpers says Pacific Grove isn't representative of other California cities. … In fiscal 2002, Pacific Grove paid less than $100,000 to Calpers, an amount equal to less than 1% of its general-fund revenue. By fiscal 2006, those costs had surged to $2.2 million, or 15% of revenue. Two-thirds of the costs went to fund retirements for police officers and firefighters. Pacific Grove didn't see a bump in its Calpers contributions for police and firefighters from 1999 through 2001. But Calpers started jacking up rates in 2003, partly reflecting improved benefits that Pacific Grove and other municipalities adopted in hopes of attracting the best safety workers. … city firefighters and police who retire at age 50 with 30 years of service may retire with 90% or more of their final year's salary. … Mr. Davis, the former city council member, who has a doctorate in mathematics. He began analyzing the Calpers rate increases and persuaded the council and the mayor that the city's long-term health was in serious jeopardy if it remained in Calpers. This summer, he and another city representative met with Calpers's chief actuary, Ron Seeling. “Ron was very professional and well prepared, but he didn't dispute the analysis,” says Mr. Davis. Mr. Seeling notes that ultimately individual cities select retiree benefits, not Calpers, and that the new smoothing formula means localities like Pacific Grove won't see any increase until 2011.”

Funding status of local plans

Dec 2008. Center for Retirement Research at Boston College

“THE FUNDING STATUS OF LOCALLY ADMINISTERED PENSION PLANS. By Alicia H. Munnell, Jean-Pierre Aubry, and Kelly Haverstick”

“Are big city pensions and other locally administered pension plans in trouble? … we collected data on 84 plans from 38 states. …

Local Pension Plan Survey (LPPS). The survey data were collected from Actuarial Reports, Comprehensive Annual Financial Reports for the individual plans, Comprehensive Annual Financial Reports for the locality that administers the plan, and Municipal and Local Ordinances. The intent was to include the two largest plans from each state. …

The goal is to compare the status of these locally administered plans in the LPPS with that of state- administered plans as reported in the 2006 Public Fund Survey prepared by the National Association of State Retirement Administrators and the National Council on Teacher Retirement. … The LPPS includes $281 billion in assets at market value and 1.6 million local workers. This sample represents 58 percent of local plan assets and 55 percent of local workers relative to the totals reported by the U.S. Census Bureau in the Employee-Retirement Systems of State and Local Governments. …

Because local plans rely slightly more heavily on the aggregate cost and projected unit credit approaches compared to state plans, one would expect a more favorable picture at the local level even if the fundamentals were identical. …

The funding ratio – plan assets divided by the actuarial accrued liability – is a snapshot of the plan’s funding status at a given moment in time. As just discussed, these ratios are not really comparable across plans in that plans using the entry age normal cost approach – compared to the projected unit credit approach – will report a larger accrued liability and a lower funding ratio for any level of assets. And those using the aggregate cost method will always report a funding ratio of 100 percent. But the only funding information available for public sector plans is that based on each plan’s actuarial costing method and assumptions. … Including the full sample suggests that local plans are noticeably better funded than state plans. Excluding the plans that employ the aggregate cost approach, funding levels for states and localities are essentially the same [state 84%, local 85%]. The rest of the analysis of funding ratios focuses on non-aggregate cost plans. These remaining plans use either the projected unit credit or entry age normal cost methods. …

Local plans have a greater percentage of plans that are fully funded and a greater percentage of plans with very low levels of funding. Among locally administered plans, 15 percent of plans have a funding ratio of less than 60 percent compared to 8 percent of state-administered plans. …

Locally administered plans appear to be doing a better job [69%] than state-administered plans [54%] in terms of covering the ARC. …

To bring all locally administered plans in the sample up to a 100 percent ARC payment would require an increase equal to 1.6 percent of payroll. This increase is lower than that required for state-administered plans [1.8%] …

Of course, averages do not tell the whole story. For cities like Chicago, Omaha, St. Louis, and others where the sponsor is paying only a fraction of the ARC, the required increase in contribution rates is large [4-14% in the examples shown]. But the challenge is equally large for state-administered plans that are failing to make their ARC, such as Illinois Universities, which would require an increased contribution rate of 15.8 percent of payroll to make its ARC, Alaska Teachers – 13.6 percent, Illinois State Employee Retirement System – 12.9 percent, and Oklahoma Public Employee Retirement System – 8.8 percent. …

the positive news about the level of pension funding is overwhelmed by the lack of funding for state and local government retiree health care promises. States and localities have not, as a rule, prefunded these costs as they have employee pensions. Researchers estimate that the total unfunded liability for retiree health benefits lies between $600 billion and $1.6 trillion, far larger than the unfunded liability for state and local pensions. Funding and managing these obligations is the real retirement challenge that states and localities face.”

[Emphasis added]

Public-sector pensions still defined benefit

11 Jul 2009. Economist p15

“Dodging the bill”

“most new public-sector employees in Britain and America continue to benefit from pensions linked to their salaries.”

GAO on condition of state OPEBs (with a little on local)

Nov 2009. GAO report.

“STATE AND LOCAL GOVERNMENT RETIREE HEALTH BENEFITS: Liabilities Are Largely Unfunded, but Some Governments Are Taking Action”

“GAO reviewed the CAFRs for 50 states and the 39 local governments with at least $2 billion in total revenue. …

The total for unfunded OPEB liabilities is higher than $530 billion because GAO reviewed OPEB data in CAFRs for the 50 states and 39 large local governments but not data for all local governments or additional data reported in separate financial reports. Also, the CAFRs we reviewed report data that predate the market downturn. Finally, OPEB valuations are based on assumptions about the health care cost inflation rate and discount rates for assets, which also affect the size of the unfunded liability. …

We found that the total reported unfunded liabilities for OPEB (which are primarily retiree health benefits) for state and select local governments exceed $530 billion. The $530 billion includes about $405 billion for states and about $129 billion for the 39 local governments we reviewed. …

we reviewed governmentwide CAFRs and not information for component entities or cost-sharing multiple-employer plans that is reported in separate financial statements and not in the CAFRs. For example, in fiscal year 2008, $2 billion in unfunded OPEB liabilities for one state’s public employees’ retiree health and life insurance plans was reported in the plans’ own financial statements and not in the state’s CAFR. Consequently, the $2 billion is not included in our total for states’ unfunded OPEB liability. …

Two significant assumptions used in OPEB liability calculations are the discount rate and the health care inflation rate. When governments value their OPEB liabilities, a decrease in the discount rate or increase in the health care inflation rate used results in higher unfunded OPEB liabilities, holding other factors, like the benefit plan and employee population, constant. A July 2009 study prepared for SLGE reported that one state’s unfunded OPEB liability increased by almost 20 percent based on a 1 percent increase in the health care inflation rate assumed. As the July 2009 SLGE study showed, actuarial valuations for state OPEB assumed discount rates rangingfrom3percentto8.5percent. Our review of 10 states’ most recently issued CAFRs found that 5 states used discount rates on the high end of that range. Further, in accordance with GASB guidance, when governments value OPEB liabilities, governments apply a health care inflation rate based on expected long-term future trends. According to the July 2009 SLGE study, virtually all state governments assume their expected long-term future rate to be about 5 percent, although actual health care inflation rates from 2002 to 2005 ranged from 16 percent to 10.3 percent, respectively.”

State and local retirement benefits grew through the crisis

23 Mar 2010. Mandel on Innovation and Growth.

“The Growing Gap between Govt and Private Sector Benefits”

“Somewhere in 2004, the world changed, and we didn’t realize it. Employers in the private sector put a lid on the cost of benefits (which includes healthcare, retirement, vacation, and supplemental pay of all sorts). Meanwhile the cost of benefits in state and local govt jobs just kept rising, with barely any break, both before and after the financial bust. This is not good.”

[Goes on to show wages did not diverge, and health spending did not diverge. The big one was retirement benefits.]

Some progress is possible via bankruptcy

26 Mar 2010. Cal Pensions.

“Bankrupt Vallejo cuts firefighter pension costs. By Ed Mendel”

“Bankrupt Vallejo’s city council approved a firefighter contract this week some city officials said may start a new trend: smaller pensions for new hires and a bigger bite from paychecks to pay for pensions.

The firefighter union agreed to cut pensions for new hires to 2 percent of final pay for each year served at age 50, down from the current 3 percent at 50 …

A new two-year contract with no pay raise, narrowly approved by a 4-to-3 vote of the city council, also increases the pension contribution from current firefighters to 13.4 percent of their pay, up from 9 percent. …

Among the savings in the firefighter contract are health costs, limited to 75 percent of Kaiser health plan rates. The total compensation for a firefighter/paramedic with 10 years of service is $178,000, down 23 percent from $230,000 in the old contract. …

A report to the city council last December said police staff dropped from a high of 155 to 104, nine fire companies were cut to six, and staff paid by the general fund was down 31 percent to 340. …

Some retiree health care cuts have been negotiated with the unions, such as a $300 a month cap on insurance payments for some firefighter retirees. The city imposed other retiree health care cuts earlier this year without union agreement.

A group representing at least 464 retirees and 53 surviving spouses filed a suit this month challenging all of the retiree health care cuts. The suit said some retirees paying little or nothing now must pay $873 to $1,219 a month for health coverage.

“Many will have to spend large portions of their monthly income on medical premiums and others will have to choose between medical care and other necessities,” said the suit.”

Rauh and Novy-Marx on local

Oct 2010. Rauh home page

“The Crisis in Local Government Pensions in the United States. ROBERT NOVY‐MARX, JOSHUA RAUH”

”… 77 pension plans sponsored by 50 major cities and counties. This sample represents all non‐state municipal entities with more than $1 billion in pension assets, covering 2.04 million local public employees and retirees. According to the U.S. Census of Governments, there are a total of 3.03 million individuals covered by 2,332 local pension plans in the United States. Thus, while we capture only 3% of municipal pension plans, we capture about 2/3rd of the universe of municipal workers. …

According to the latest reports issued by the governments themselves, these municipalities have $488 billion in liabilities. When we reverse engineer the cash flows and limit the recognition to only those benefits that have been promised based on today’s service and salary, this figure drops to $430 billion. When we use taxable AA+ municipal yield curves to discount them, we obtain liability measures that are around 18% larger. When we use the Treasury yield curve, we find a total liability of $681 billion, which is 39% above the stated level and 58% above the already‐promised benefit at municipally‐ chosen rates. Net of the assets in the plans, the unfunded liability is $383 billion using Treasury discounting, or over $5,300 per capita and over $185,000 per member. If on a per‐member basis the unfunded liability is the same for the approximately 1 million local workers covered by municipal plans not in our sample, the total unfunded liability for all municipal plans in the U.S. would be $574 billion. …

The $0.6 trillion unfunded liability in major municipalities obviously is much smaller than a $3 trillion unfunded liability for state governments. Relative to the municipalities’ resources and taxes, however, the unfunded liability is large. The 50 municipalities with the $382 billion unfunded liability that we measure had 2006 revenues of $120 billion. The unfunded liability is therefore equivalent to 3.2 full years of revenue. For the comparable time period, the 116 state‐sponsored plans had a $2.52 trillion unfunded liability and $0.78 trillion in revenues, for a ratio of 3.2 full years of revenue. Thus, relative to the public entity’s current tax resources, the extent of the gap between assets and liabilities in the municipal is almost exactly the same as in state plans.”

Empire Center on NY public retirement health plans

13 Oct 2010. Empire Center.

“Iceberg ahead: The hidden cost of public sector retiree health benefits in New York. E.J.McMahon”

“Classified by accountants as Other Post-Employment Benefits, or OPEB, retiree health insurance is rarely offered by private sector employers—but it’s among the fastest-growing components of public-sector employee compensation at every level of government. OPEB accounts for nearly 40 percent of annual em- ployee health benefit costs at the state level, and for more than one-third of the an- nual total in New York City. Buffalo, the state’s second largest city, already spends more every year on retiree health insurance than on coverage for active workers. …

[Table shows unfunded OPEB obligation for New York state is $60 billion, and for all state and local governments is $205 billion.

In comparison, the Census shows that in 2008 state pension plans had assets of $277 billion and local pension plans had assets of $116 billion.]

Share of members and assets in local plans

16 Oct 2010. Census of Governments.

As of 2008 there were 2332 local government pension systems (compared to 218 state systems). Local systems had 1.9 million members (compared to 17.2 million state members). Total assets of local systems were $526 million (compared to $2,664 million in state systems). Local systems thus claimed 10% of the combined state and local government pension system members and 16% of the combined assets.

[Note the Census of Governments only covers pension plans, not retirement health care plans.]

Morgan Stanley on municipal bankruptcy

18 Oct 2010. Posted in FT Long Room

“Euroland Economics: The Local Finances: Do We Need to Worry? Daniele Antonucci, Elga Bartsch, Matthew Garman”

“One key difference between the euro area and the US is that the US has a specific section of its bankruptcy code for municipalities (Chapter 9), which aims at providing certain protections to permit the development of a plan to restructure and adjust a municipality’s debt. The goal is to allow it to keep providing essential services. Creditors and the court have limited influence on the continuing political and economic decisions of that municipality, which, for example, could raise taxes to improve its income. And the municipality also has available all the rights of bankruptcy protection, enabling it to get rid of unfavourable contracts and other agreements which are causing problems. A similar insolvency regime is currently lacking in Europe.

Yet our municipal strategist notes that US states do not legally have access to bankruptcy under the law, as Chapter 9 bankruptcy is only available to local government units. And, for the latter, Chapter 9 tends to be a difficult avenue to access, as the burden of proof that a local government is insolvent requires substantial evidence to be presented and approved by a court before a filing is allowed. Moreover, the government has to prove that, ahead of bankruptcy, it went through a negotiation with all stakeholders, and that such process failed to lead to a reasonable resolution. And many US states do not allow their local governments to use Chapter 9. Rather, they prefer intervention in times of fiscal distress (see Knox and Levinson, 2009). Thus, we think that the use of bankruptcy as a policy tool remains unlikely.”

Solid overview of the pension problem in San Francisco

20 Oct 2010. SF Weekly

“Let it bleed. By Joe Eskenazi and Benjamin Wachs”


Local obligations may be understated, due to contributions to state funds

17 Feb 2011.,s01=1.html

“Downgrades loom for US states. By Nicole Bullock”

“For state-run plans that also cover local workers, Fitch said it is difficult to assess how much of the liability is the obligation of the local government because plans typically do not provide this breakdown. That can overstate states’ obligation and understate what local governments owe.”