A Conversation With…

The Government Finance Research Center works with researchers from a variety of backgrounds to analyze the role that public finance plays in our lives. In the interviews below, we talk with experts to dig deeper into pertinent topics and get their perspective on the past, present, and future of government finance.

Joshua Franzel, President/CEO, Center for State and Local Government Excellence (SLGE)

Josh Franzel

Just to kick things off, what do you see as the broader issues being discussed among people who study state and local pensions.

Overall, we see the continued balance government employers are trying to make between comprehensive, quality retirement benefits and underlying benefit costs. While this focus is not new, it now comes against the backdrop of the COVID-19 economy and its impact on government budgets and pension plan financial health.

 What have been the big surprises recently?  

State and local pension funded ratios have been relatively stable. According to a brief released by SLGE and the Center for Retirement Research (CRR), for state plans, in 2020 they have an average funding level of 72 percent and for the locals they’re at 71 percent. Under expected scenarios, by the end of 2025, state plans will be funded, on average, at 68.2 percent, and local plans will be at 64.6 percent. With more muted assumptions, the ratio for states would be at 65.2 percent and locals at 61.7 percent.

So, are those projections troublesome?

While many governments will have to make larger contributions to the defined benefit retirement plans they sponsor, even with more conservative investment returns through 2025, we expect the vast majority of local and state plans to not have any cash flow issues. That said, for a small subset of plans with the lowest funded ratios, in the absence of substantial benefit reform, they may have cash flow challenges shortly after 2025.

So, as you alluded to in answer to my first question, is it true that the sustainability of benefits in a down economy will require adjustments by the city and state plans?

Yes. For many plans the employer and employee contributions may have to continue to go up. At the same time, we likely will see increased interest in retirement benefit arrangements that adjust contributions and benefits based on the underlying fiscal health of the plans.

What impact might that have on the workforce?

For many positions, wage compensation in the public sector is lower than for similar private sector jobs. So, if you are increasing the costs to employees to support their retirement plans, absent increased wages, you may be decreasing the attractiveness of public sector jobs. We’ve seen evidence of that phenomenon in surveys of HR directors. 85% of state and local HR directors believe retirement benefits offered are competitive with the labor market

That’s quite a conundrum, right?

I think of it as a Rubik’s Cube of challenges.  We have seen a wave of pension reform over the past decade that often has reduced the generosity of benefits and increased employee contributions with a focus on improving the financial positions of these public plans – which is important. But many miss that retirement benefits are workforce management tools that help with recruitment and retention – so changes that reduce the overall value of these benefits may impact governments’ ability to develop their current and future workforces.

All in all, despite all the alarming articles about public sector pensions, you don’t appear to be concerned. Is that right?

The sky is not falling. Public Pensions have gone through three economic downturns in 20 years and the vast majority are on sustainable paths, with the understanding that future reforms may happen. Looking forward, given all of the changes that have gone on in the public sector pension space, which may decrease the overall value of these pension benefits for many public sector workers, it is important that we continue to focus on the role of supplemental savings to ensure these workers have secure retirement and financial wellness to assist these workers in making sound financial decisions overall for the short and long term.

 

Interview conducted by Katherine Barrett and Richard Greene, senior advisers, GFRC; hyperlinks added by Joshua Franzel, subsequent to interview.

 

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