STATE AND LOCAL 

GOVERNMENT 

PENSION PLANS

Economic Downturn 

Spurs Efforts to 

Address Costs and 

Sustainability

Report to Congressional Requesters

March 2012

GAO-12-322

United States Government Accountability Office

GAO
United States Government Accountability Office

Highlights of GAO-12-322, a report to 

congressional requesters

March 2012

STATE AND LOCAL GOVERNMENT PENSION 

PLANS 

Economic Downturn Spurs Efforts to Address Costs 

and Sustainability

Why GAO Did This Study

Over 27 million employees and 

beneficiaries are covered by state and 

local government pension plans. 

However, the recent economic 

downturn and associated budget 

challenges confronting state and local 

governments pose some questions as 

to the sustainability of these plans, and 

what changes, if any, state and local 

governments are making to strengthen 

the financial condition of their pension 

plans. GAO was asked to examine 

(1) recent trends in the financial 

condition of state and local government 

pension plans and

(2) strategies state and local 

governments are using to manage 

pension costs and the impacts of these 

strategies on plans, sponsors, 

employees, and retirees. 

To address these topics, GAO 

analyzed various measures of sectorwide financial condition based on 

national-level data on pension funding 

from the U.S. Census Bureau and 

others, and reviewed information on 

recent state legislative changes 

affecting government pensions from 

annual reports prepared by the 

National Conference of State 

Legislatures (NCSL). GAO did not 

assess the soundness of individual 

plans, but did obtain documents and 

conduct interviews with pension and 

budget officials in eight states and 

eight localities, selected to illustrate the 

range of strategies being implemented 

to meet current and future pension 

funding requirement. 

The Internal Revenue Service and 

Social Security Administration provided 

technical comments, which were 

incorporated, as appropriate.

What GAO Found

Despite the recent economic downturn, most large state and local government 

pension plans have assets sufficient to cover benefit payments to retirees for a 

decade or more. However, pension plans still face challenges over the long term 

due to the gap between assets and liabilities. In the past, some plan sponsors 

have not made adequate plan contributions or have granted unfunded benefit 

increases, and many suffered from investment losses during the economic 

downturn. The resulting gap between asset values and projected liabilities has 

led to steady increases in the actuarially required contribution levels needed to 

help sustain pension plans at the same time state and local governments face 

other fiscal pressures.

Since 2008, the combination of fiscal pressures and increasing contribution 

requirements has spurred many states and localities to take action to strengthen 

the financial condition of their plans for the long term, often packaging multiple 

changes together. GAO’s tabulation of recent state legislative changes reported 

by NCSL and review of reforms in selected sites revealed the following:

• Reducing benefits: 35 states have reduced pension benefits, mostly for future

employees due to legal provisions protecting benefits for current employees 

and retirees. A few states, like Colorado, have reduced postretirement benefit 

increases for all members and beneficiaries of their pension plans. 

• Increasing member contributions: Half of the states have increased member 

contributions, thereby shifting a larger share of pension costs to employees. 

• Switching to a hybrid approach: Georgia, Michigan, and Utah recently 

implemented hybrid approaches, which incorporate a defined contribution plan 

component, shifting some investment risk to employees. 

At the same time, some states and localities have also adjusted their funding 

practices to help manage pension contribution requirements in the short term by 

changing actuarial methods, deferring contributions, or issuing bonds, actions 

that may increase future pension costs. Going forward, growing budget 

pressures will continue to challenge state and local governments’ abilities to 

provide adequate contributions to help sustain their pension plans.

Notable Changes to State-Sponsored Pension Plans (January 2008 to June 2011)

View GAO-12-322. For more information, 

contact Barbara D. Bovbjerg at (202) 512-

7215 or bovbjergb@gao.gov, or Stanley J.

Czerwinski at (202) 512-6806 or 

czerwinskis@gao.gov. 
Page i GAO-12-322 State and Local Pensions

Letter 1 

Background 4

Plans Have Sufficient Assets to Pay Near-Term Benefits, but 

Growing Budget Pressures Will Challenge Their Sustainability 7

States and Localities Have Made Changes to Reduce Costs and 

Improve Plan Sustainability 18

Concluding Observations 33

Agency Comments 34

Appendix I Profiles of Selected State and Local Government Pensions 36

Appendix II Actuarial Methods and Assumptions for Measuring Funded Status

for Public Sector Defined Benefit Plans 45

Appendix III GAO Contacts and Staff Acknowledgments 49

Tables

Table 1: State and Local Plans Selected for Review 3

Table 2: Understanding the Financial Condition of a Public Defined 

Benefit Plan 10

Table 3: Median Contribution Rates for Large Plans as a Percentage 

of Payroll 15

Figures

Figure 1: State and Local Government Pension Contributions, 

Fiscal Year 2009 4

Figure 2: Investment Returns for State and Local Government 

Pension Plans, Fiscal Years 2005–2009 9

Figure 3: Historical Trends in the Financial Condition of State and 

Local Government Pension Plans—Aggregate Ratio of 

Market Assets to Total Expenditures, 1957–2009 11

Figure 4: Variability in Large Plans’ Ratios of Assets to Annual 

Expenditures, Fiscal Year 2009 11

Contents
Page ii GAO-12-322 State and Local Pensions

Figure 5: Aggregate Funding Ratio: Trend Data for Large State and 

Local Government Pension Plans, Fiscal Years 2001–2010 14

Figure 6: Distribution of Percentage of ARC Paid for Large Plans, 

Fiscal Year 2010 16

Figure 7: Notable Changes to State-Sponsored Pension Plans, 

January 2008–June 2011 19

Figure 8: Pension Obligation Bond Issuances Nationwide, January 

2006–June 2011 29

Abbreviations

ARC annual required contribution

ASB Actuarial Standards Board

CAFR Comprehensive Annual Financial Report

COLA cost-of-living adjustment

CPI-W Consumer Price Index for Urban Wage Earners and 

 Clerical Workers

ERISA Employee Retirement Income Security Act of 1974

GAAP generally accepted accounting principles

GASB Governmental Accounting Standards Board

NASBO National Association of State Budget Officers

NCSL National Conference of State Legislatures

POB pension obligation bond

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Page 1 GAO-12-322 State and Local Pensions

United States Government Accountability Office

Washington, DC 20548

March 2, 2012

The Honorable Herb Kohl

Chairman

Special Committee on Aging

United States Senate

The Honorable Michael B. Enzi

Ranking Member

Committee on Health, Education,

Labor, and Pensions

United States Senate

The recent economic downturn combined with continuing budget 

challenges has heightened concerns about the financial condition of state 

and local pension plans. Pension funding is a long-term endeavor, but 

states and local governments often have annual balanced budget 

requirements that can pit government contributions to pension plans 

against other pressing funding needs. Although state and local retiree 

benefits are not subject, for the most part, to federal laws governing 

private sector retiree benefits, the federal government has an interest in 

ensuring that all Americans have a secure retirement. This includes the 

over 27 million people covered by state and local government pension 

plans.1

1. recent trends in the financial condition of state and local government 

pension plans and

The federal government also has an interest in the challenging 

fiscal situation facing the state and local sectors because fiscal health 

presents a national challenge shared by all levels of government. In light 

of these concerns, you asked us to examine

2. strategies state and local governments are using to manage pension 

costs and the impacts of these strategies on plans, sponsors, 

employees, and retirees.

 

1

This total is based on the U.S. Census Bureau’s 2009 Survey of State and Local PublicEmployee Retirement Systems and includes active members, inactive members, and 

beneficiaries.

 
 

Page 2 GAO-12-322 State and Local Pensions

To describe trends in the financial condition of state and local pension 

funds, we analyzed various measures of sector-wide financial condition 

based on existing national-level data on pension funding. We analyzed 

data from the U.S. Census Bureau’s surveys of state and local retirement 

systems and from the Public Plans Database developed by the Boston 

College Center for Retirement Research, which includes financial data on 

126 large state and local defined benefit plans covering more than 85 

percent of total state and local government pension assets and members. 

To better understand the context for these trends, we reviewed existing 

literature on state and local government pension plans and interviewed 

national experts on state and local government pension issues.

To identify the prevalence of various strategies state and local 

governments are using to manage pension costs, we analyzed nationallevel data on state legislative changes and use of bonds to finance their 

plans. Specifically, to identify legislative changes, we analyzed annual 

reports prepared by the National Conference of State Legislatures 

(NCSL) summarizing selected state pension and retirement legislation 

enacted from January 1, 2008, through June 30, 2011.2 We limited our 

analysis of these NCSL reports to changes affecting broad categories of 

employees, such as state employees, teachers, public safety personnel, 

and local employees who are members of state-administered plans. In 

some limited instances, to better understand a legislative change, we 

reviewed supplemental documents such as pension plan documents and 

summaries of the legislation prepared by plans, state legislative counsel, 

or state agencies. We did not conduct an independent legal analysis to 

verify the accuracy of the information pertaining to recently enacted 

legislation contained in the NCSL reports. To identify bonds issued for the 

purpose of financing public pension plans, we analyzed multiple sources 

of bond data, including Mergent BondViewer and the Electronic Municipal 

Market Access system.3

 

2

Ronald K. Snell, NCSL, Pensions and Retirement Plan Enactments, annual reports for 

2008-2010 and 2011 report as of June 30, 2011. For additional information about the state 

legislative changes described in this report, refer to the NCSL reports.

We supplemented these national-level data by 

interviewing state and local pension and budget officials, and reviewing 

financial and actuarial reports, from a small judgmental sample of plans 

from eight states, and one locality within each of these states, that had 

3

Mergent BondViewer is an online database of bond data. The Electronic Municipal 

Market Access system, maintained by the Municipal Securities Rulemaking Board, is an 

online database of municipal disclosures and data on the municipal securities market
 

Page 3 GAO-12-322 State and Local Pensions

implemented pension modifications since 2008 (see table 1). This 

judgmental sample was selected to provide examples of plans 

experiencing a range of financial conditions and types of strategies 

adopted by their sponsors. We based this selection on our analysis of 

NCSL annual reports on pension legislation and suggestions from our 

interviews with pension experts. We did not assess the financial 

soundness of individual plans.

Table 1: State and Local Plans Selected for Review

State State plan Locality Local plan

California • California State Teachers’ Retirement System

• California Public Employees’ Retirement 

System

Sonoma County Sonoma County Employees’ Retirement 

Association

Colorado • Colorado Public Employees’ Retirement 

Association 

City of Denver Denver Employees Retirement Plan

Georgia • Employees’ Retirement System of Georgia Cobb County Cobb County Employees’ Retirement 

System Pension Plan

Illinois • State Employees’ Retirement System of Illinois

• Teachers’ Retirement System of the State of 

Illinois

City of Chicago Policemen’s Annuity and Benefit Fund of 

Chicago

Missouri • Missouri State Employees’ Retirement System

• Missouri Department of Transportation and 

Highway Patrol Employees’ Retirement System

City of Springfield Police Officers’ and Firefighters’ 

Retirement Fund

Pennsylvania • Pennsylvania Public School Employees’ 

Retirement System

• Pennsylvania State Employees’ Retirement 

System

City of Philadelphia City of Philadelphia Municipal Pension 

Plan 

Utah • Utah Retirement Systems City of Bountiful Public Safety Retirement System (City of 

Bountiful)- part of the Utah Retirement 

Systems 

Virginia • Virginia Retirement System City of Norfolk Employees’ Retirement System of the City 

of Norfolk

Source: GAO.

Note: See appendix I for more detailed profiles of each state, locality, and plan.

We conducted this performance audit from December 2010 to March 

2012 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.
 

Page 4 GAO-12-322 State and Local Pensions

There are over 3,400 state and local pension systems in the United 

States, according to the most recent Census Bureau Survey of State and 

Local Public-Employee Retirement Systems.4 Most large plans are state 

plans, and more state and local employees are covered by stateadministered plans than by locally-administered plans (about 24 million 

members and beneficiaries compared with about 3 million). However, 

there are more local government employees than state government 

employees (about 14 million compared with about 5 million), and while 

local governments sometimes participate in plans administered by states, 

the local governments generally retain responsibility for contributing the 

employer’s share of funding to the plans for their employees. As a result, 

local governments contribute more to pension plans each state fiscal 

year, overall, than do state governments (see fig. 1).5

Figure 1: State and Local Government Pension Contributions, Fiscal Year 2009

Pension plans are generally characterized as either defined benefit or 

defined contribution plans. Unlike in the private sector, defined benefit 

 

4

U.S. Census, 2009 Survey of State and Local Public-Employee Retirement Systems 

(Washington, D.C. 2011).

5

Throughout this report, the term “fiscal year” refers to state fiscal year (as opposed to 

federal fiscal year). State fiscal years vary, but most run from July 1 to June 30, according 

to the Census Bureau. 

Background 
 

Page 5 GAO-12-322 State and Local Pensions

plans provide primary pension benefits for most state and local 

government workers. About 78 percent of state and local employees 

participated in defined benefit plans in 2011, compared with only 18 

percent of private sector employees.6 In a defined benefit plan, the 

amount of the benefit payment is determined by a formula (in the public 

sector, the formula is typically based on the retiree’s years of service and 

final average salary, and is most often provided as a lifetime annuity). 

However, unlike private sector employees with defined benefit plans, 

state and local government employees generally contribute to their 

defined benefit plans. A few states offer defined contribution or other 

types of retirement plans as the primary retirement plan.7

Also unlike in the private sector, many state and local employees are not 

covered by Social Security. About 6.4 million, or over one-fourth, of state 

and local government employees are not eligible to receive Social 

Security benefits based on their government earnings and do not pay 

Social Security taxes on earnings from their government occupations.

In a defined 

contribution plan, the key determinants of the benefit amount are the 

member’s and employer’s contribution rates, and the rate of return 

achieved on the investments in an individual’s account over time. 

Alternatively, some states have adopted hybrid approaches that combine 

components of both defined benefit and defined contribution plans.

8

 

6

U.S. Department of Labor, Bureau of Labor Statistics, National Compensation Survey: 

Employee Benefits in the United States, March 2011 (Washington, D.C.: 2011).

As 

a result, employer-provided pension benefits for non-covered employees 

are generally higher than for employees covered by Social Security, and 

employee and employer contributions are higher as well.

7

As we have previously reported, all states also offer a voluntary, supplemental defined 

contribution option in addition to their primary defined benefit plan. See GAO, State and 

Local Government Retiree Benefits: Current Status of Benefit Structures, Protections, and 

Fiscal Outlook for Funding Future Costs, GAO-07-1156 (Washington, D.C.: Sept. 24, 

2007). 

8

42 U.S.C. § 410(a)(7). Historically, Social Security did not require coverage of 

government employment. In 1950, Congress enacted legislation allowing voluntary 

coverage to state and local government employees not covered by public pension plans, 

and in 1955, extended voluntary coverage to those already covered by plans as well. 

Social Security Act Amendments of 1950, Pub. L. No. 809, § 106, 64 Stat. 477 (1950), 

codified at 42 U.S.C. § 218(a) &(d); Social Security Amendments of 1956, Pub. L. No. 

880, § 211 (e), 70 Stat. 807 (1956), codified at 42 U.S.C. § 218(d)(6).
 

Page 6 GAO-12-322 State and Local Pensions

The federal government has not imposed the same funding and reporting 

requirements on state and local pensions as it has on private sector 

pension plans.9

 State and local government pension plans are not 

covered by most of the substantive requirements under the Employee 

Retirement Income Security Act of 1974 (ERISA)—requirements which 

apply to most private employer benefit plans. Nor are they insured by the 

Pension Benefit Guaranty Corporation as private plans are. Federal law 

generally does not require state and local governments to prefund or 

report on the funded status of pension plans. However, in order for 

participants to receive preferential tax treatment (that is, for employee 

contributions and investment earnings to be tax-deferred), state and local 

pensions must comply with certain requirements of the Internal Revenue 

Code.10

State and local governments also follow different standards than the 

private sector for accounting and financial reporting. The Governmental 

Accounting Standards Board (GASB), an independent organization, has 

been recognized by governments, the accounting industry, and the capital 

markets as the official source of generally accepted accounting principles 

(GAAP) for U.S. state and local governments. GASB’s standards are not 

federal laws or regulations and GASB does not have enforcement 

authority. However, compliance with its standards is enforced through 

laws of some individual states and the audit process, whereby auditors 

render opinions on the fair presentation of state and local governments’ 

 

9

To further clarify the difference between government and private sector pension plans, 

the Internal Revenue Service issued an advance notice of proposed rulemaking in 

November 2011 relating to the definition of the term “governmental plan.” The guidance 

under consideration is intended to establish coordinated criteria for determining whether a 

plan is a governmental plan and address current uncertainty regarding entities with 

organizational, regulatory, and contractual connections with states or political subdivisions 

of states. Determination of Governmental Plan Status, 76 Fed. Reg. 69,172 (Nov. 8, 

2011), to be codified at 26 C.F.R. § 1.414(d)-1.

10Contributions to qualified pension plans that meet certain requirements—whether 

defined benefit or defined contribution—are generally not counted as taxable income to 

employees when the contributions are made. However, when pension benefits are paid, 

amounts not previously taxed are subject to federal and perhaps state tax. This also 

applies to the interest income such contributions generate. As an alternative, some state 

and local qualified pension plans provide an option for designated Roth contributions to 

Roth accounts, and such contributions to Roth accounts are made after taxation. The 

interest income earned on such contributions is generally not subject to tax upon 

distribution, provided that the requirements and restrictions applicable to such accounts 

under the Internal Revenue Code have been satisfied.
 

Page 7 GAO-12-322 State and Local Pensions

financial statements in conformity with GAAP. GASB’s standards require 

reporting financial information on pensions, such as the annual pension

cost, contributions actually made to the plan, and the ratio of assets to 

liabilities. In addition, actuarial standards of practice are promulgated by 

the Actuarial Standards Board. These standards are designed to provide 

practicing actuaries with a basis for assuring that their work will conform 

to appropriate practices and to assure the public that actuaries are 

professionally accountable (see app. II for information on recently 

proposed changes to GASB and Actuarial Standards Board standards).

Some municipal bond analysts have reported concerns about state and 

local governments’ creditworthiness in light of the recent economic 

downturn and continuing pension obligations. In 2008 and 2010, 

respectively, the Securities and Exchange Commission took enforcement 

actions against the city of San Diego and the state of New Jersey for 

misrepresenting the financial condition of their pension funds in 

information provided to investors.11

Although pension plans suffered significant investment losses from the 

recent economic downturn, which was the most serious since the Great 

Depression, most state and local government plans currently have assets 

sufficient to cover their benefit commitments for a decade or more. 

Nevertheless, most plans have experienced a growing gap between 

actuarial assets and liabilities over the past decade, meaning that higher 

contributions from government sponsors are needed to maintain funds on 

an actuarially based path toward sustainability. In spite of budget 

pressures through the recession, most plans continued to receive 

prerecession contribution levels on an actuarial basis from their sponsors, 

with most plans contributing their full actuarial level. However, there were 

some notable exceptions, and these plans continued to receive lower 

contribution payments. State and local governments experienced 

declining revenues and growing expenses on other fronts, and growing 

budget pressures will continue to challenge their ability to provide 

adequate contributions to help sustain their pension funds.

 

11GAO is conducting work under Section 976 of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act, enacted in 2010, to study the information that state and local 

governments provide investors in municipal securities, including the advantages and 

disadvantages of providing additional financial information. The report is scheduled for 

issuance in summer 2012.

Plans Have Sufficient 

Assets to Pay NearTerm Benefits, but 

Growing Budget 

Pressures Will 

Challenge Their 

Sustainability 
 

Page 8 GAO-12-322 State and Local Pensions

The recent economic downturn resulted in state and local pension plans 

suffering significant investment losses. Positive investment returns are an 

important source of funds for pension plans, and have historically 

generated more than half of state and local pension fund increases. 

However, rather than adding to plans’ assets, investments lost more than 

$672 billion during fiscal years 2008 and 2009, based upon Census 

Bureau figures for the sector (see fig. 2). Since 2009, improvements in 

investment earnings have helped plans recover some of these losses, as 

evidenced by more recent Census Bureau data on large plans.12 More 

importantly, however, public pension plans have built up assets over 

many years through prefunding (that is, employer and member 

contributions) and through the accumulation of associated investment 

returns.13

 

12Based on Census quarterly data on 100 large retirement systems, investment returns 

have been mostly positive since the second quarter of 2009. See Census, Finances of 

Selected State and Local Government Employee Retirement Systems. 

13A prefunded plan means a plan has set aside funds for pension obligations made for 

current employees as opposed to pay-as-you go plan, which does not set aside funds to 

pay for future obligations to current employees. 

Despite Investment Losses, 

Most Plans Hold Sufficient 

Assets to Pay Benefit 

Obligations for the Near 

Future 
 

Page 9 GAO-12-322 State and Local Pensions

Figure 2: Investment Returns for State and Local Government Pension Plans, Fiscal 

Years 2005–2009

Assessing the financial condition across all plans using actuarially 

determined figures (such as a plan’s funded ratio) is challenging, in part, 

because of the various methods and assumptions used by these plans 

(see app. II). One alternative measure of financial condition across 

pension plans, although not optimal when assessing the financial health 

of a single plan, is the ratio of fund assets to annual expenditures.14 Fund 

assets represent the dollar amount a plan has built up, while annual 

expenditures ultimately determine how quickly assets are spent down.15

 

14Expenditures include both annual benefit payments and any expenses paid out of plan 

assets.

Alternatively, when assessing the financial condition of an individual 

defined benefit plan, various approaches are used, and looking at multiple 

factors is especially useful in providing a more complete picture of a 

plan’s financial condition. In addition to the level of funding (level of plan 

assets relative to plan liabilities), assessments of a plan’s financial 

15However, using nonactuarial figures is a simplification because it does not consider the 

unique demographic profile—especially, the relative proportions of retired and active 

workers in the plan’s actuarial liability—and related data associated with each plan.
 

Page 10 GAO-12-322 State and Local Pensions

viability by rating agencies and others may take into consideration the 

influence of the plan sponsor, the plan’s underlying methods and 

assumptions, and efforts to manage risk (see table 2).

Table 2: Understanding the Financial Condition of a Public Defined Benefit Plan

 Sample questions 

Influence of plan sponsor • Has the government sponsor maintained its actuarial required contributions over 

time?

• What is the outlook for the government sponsor’s economy and budget (to afford 

future contributions)?

• Is the plan’s sponsor able to adjust the plan’s design (that is, benefit levels), if 

needed?

Underlying plan methods and 

assumptions

• Are underlying actuarial assumptions reasonable, such as the plan’s discount rate or 

assumptions for inflation and salary growth?

• Do the sponsor’s actuarial methods for determining the rapidity of prefunding 

(actuarial cost methods for assigning costs to time periods, amortization periods, and 

any asset smoothing methods) produce a responsible path toward funding the 

obligation?

• Who ultimately determines a plan’s methods and assumptions?

• Are those making these decisions doing so with sound professional judgment?

Managing risk • Is a plan’s investment portfolio properly positioned to balance risk and returns?

• Has a risk evaluation, management, and reporting framework been identified to help 

manage plan risk?

• Has the risk analysis and asset allocation decision taken into account relevant risk 

factors, such as the size of the sponsor’s plans relative to the size of the plan 

sponsor’s tax base, budget, or other measure of economic resources?

• Do the plan’s benefit formulas or governance processes subject the plan sponsor to 

the risk of significant increases in benefit promises?

Source: GAO analysis.

As illustrated in figure 3, an analysis of historical Census Bureau data on 

state and local government pensions shows that the ratio of fund assets 

to annual expenditures fell during the stock market downturn related to 

the oil crisis of the early 1970s, but eventually recovered and reached its 

peak in 2000, driven by strong investment results throughout the 1990s. 

Since that peak, both the market downturn in the early 2000s and 

sustained economic weakness beginning in 2008 drove the ratio of 

sector-wide assets relative to expenditures lower. Overall, these data 

show that the aggregate ratio of fund assets to annual expenditures, as of 

2009, is lower, but in line with historical norms dating back to 1957.
 

Page 11 GAO-12-322 State and Local Pensions

Figure 3: Historical Trends in the Financial Condition of State and Local Government Pension Plans—Aggregate Ratio of 

Market Assets to Total Expenditures, 1957–2009

At the same time, data on individual plans indicate that this measure can 

vary considerably across plans. As illustrated in figure 4, data on large 

plans for fiscal year 2009 show that their fund assets relative to annual 

expenditures varied widely, with ratios ranging from less than 5 to greater 

than 20.

Figure 4: Variability in Large Plans’ Ratios of Assets to Annual Expenditures, Fiscal 

Year 2009
 

Page 12 GAO-12-322 State and Local Pensions

From the early years of prefunding of pension plans, sector-wide plan 

contributions outpaced plan expenditures, but by the early 1990s, 

expenditures began outpacing contributions.16 This trend was predictable. 

As public plans matured, they began to have greater proportions of retirees 

to active workers. As such, payments to retirees increased relative to plan 

contributions and, as a result, in more recent years, sector-wide 

expenditures have outpaced contributions.17 Nevertheless, given the asset 

levels of most state and local government plans and the pace of 

expenditures relative to contributions, most plans can be expected to cover 

their commitments for the near future with their existing assets.18 For 

example, even if these plans received no more contributions or investment 

returns, most large plans would not exhaust their assets for a decade or 

longer, since they hold assets at least 10 times their annual expenditures.

While state and local pension plans have sufficient assets to meet their 

obligations in the near future, an examination of actuarially determined 

funded ratios among large plans shows a growing gap between their 

 

16This trend is consistent with actuarial practices of pension plans that have increasing 

proportions of retirees (that is, maturing plans).

17Whether pension funds grow or diminish depends on whether positive investment 

returns and contributions stay ahead of pension fund expenditures.

18A study by the Center for Retirement Research at Boston College analyzing plan assets 

relative to benefit payments and projecting these figures forward, assuming investment 

return rates of 6 and 8 percent respectively, showed that most large plans have enough 

prefunded resources to cover their benefit payments for at least 30 years, with a few 

notable exceptions. Plans included in this study were chosen from the largest plans from 

each state as well as a judgmental sample of locally administered plans. The study was 

based upon 2009 data that did not reflect investment return gains over 2010 or recent 

state and local government efforts to increase employee contributions and reduce benefits 

for new employees, See Alicia H. Munnell, Jean-Pierre Aubry, Josh Hurwitz, and Laura 

Quinby, Can State and Local Pensions Muddle Through?(March 2011). Also, just prior to 

the economic crisis, we reported that most state and local government pension plans had 

enough invested resources to keep up with benefits they were scheduled to pay for 

several decades. See GAO, State and Local Government Retiree Benefits: Current 

Funded Status of Pension and Health Benefits, GAO-08-223 (Washington, D.C.: Jan. 29, 

2008). There have been other studies projecting the longevity of state and local pension 

plans; notably a study by Joshua Rauh, see Joshua D. Rauh, Are State Public Pensions 

Sustainable? Why the Federal Government Should Worry About State Pension Liabilities, 

(May 15, 2010). The study projected some notably early fund exhaustion dates, including 

some funds running out of money this decade. However, the study was based on the 

assumption that benefits earned to date would only be financed out of current plan assets 

and not from any future contributions. The projected exhaustion dates are thus not 

realistic estimates of when the funds might actually run out of money.

Plans Face a Growing Gap 

between Assets and 

Liabilities, Leading to 

Higher Contribution 

Requirements
 

Page 13 GAO-12-322 State and Local Pensions

assets and liabilities.19 This ratio is important since, on a plan-by-plan 

basis, a plan’s funded ratio shows the plan’s funding progress and is part 

of the basis for determining contribution levels necessary for fund 

sustainability.20 As a result of recent market declines and other reasons—

such as sponsors’ failure to keep pace with their actuarially required 

contributions and benefit increases during the early 2000s—funded ratios 

have trended lower. Data compiled on large plans indicate that the funded 

ratios for these plans, in aggregate, have fallen over the past decade from 

over 100 percent in fiscal year 2001 to 75.6 percent in fiscal year 2010.21

 

19The funded ratio is calculated by dividing plan actuarial assets by plan actuarial 

liabilities. See appendix II for additional information on actuarial methods and measures.

(See fig. 5.)

20Current GASB standards include a measure known as the annual required contribution, 

or ARC, which is not necessarily the same amount as the contribution actually made by 

the employer to the plan. Conceptually, the ARC is an amount that would cover the 

employer’s share of costs attributable to the current year of employee service (the “normal 

cost”), plus an amount to eliminate the plan’s unfunded liability over an amortization 

period, all determined in accordance with an actuarially sound funding method selected for 

the plan (of which there are multiple choices). The accounting cost—that is, the cost for 

the year recognized in the employer’s financial statements—is based on this ARC. In this 

sense, the accounting is based on the stated funding method selected by the employer. 

But the employer may or may not actually contribute the ARC in any given year, so that 

the accounting cost may differ from the funding cost. See appendix II for information on 

proposed changes to GASB standards.

21Analyzing the aggregate level of large plans minimizes the difficulties in making 

comparisons across plans with actuarially based data, since these data include the same 

group of plans over time. Most plans keep their key actuarial methods fairly steady over 

time, with some significant exceptions. For example, any given plan will typically use a 

similar cost method, smoothing, and amortization period over time. 
 

Page 14 GAO-12-322 State and Local Pensions

Figure 5: Aggregate Funding Ratio: Trend Data for Large State and Local 

Government Pension Plans, Fiscal Years 2001–2010

Note: The number of large plans included in the analysis ranged from 119 to 126 plans.

Several factors have contributed to the growing gap between plans’ 

actuarial assets and liabilities. For example, large pension funds generally 

assumed investment returns ranging from 6 to 9 percent throughout the 

2000s, including assuming returns of approximately 8 percent, on 

average, in 2009, despite the declines in the stock market during this 

time.22 Pension portfolios maintain other assets beside equities; however, 

gains in these other asset classes did not make up the amounts lost by 

negative equity performance over this period.23

 

22Plans typically perform “experience studies” as one factor to guide them in making 

adjustments to their underlying actuarial assumptions such as adjusting expected 

employee salary levels or retiree life expectancies.

It is important to note that 

the period from 2008 to 2009 was an extraordinary low period for returns 

on investments in the financial history of the United States. 

23See National Association of State Retirement Administrators, Public Fund Survey 

Summary of Findings for FY2009, (November 2010).

Growing Gap between 

Actuarial Assets and Liabilities 
 

Page 15 GAO-12-322 State and Local Pensions

Benefit increases were another important reason for the growing gap 

between assets and liabilities over the past decade. These increases 

were enacted early in the decade when the funded status of plans was 

strong. For example, 11 states increased pension benefits in 2001 

according to reports from the National Conference of State Legislatures.24

Among the sites included in our review, Pennsylvania enacted legislation 

in 2001 that increased the pension benefit multiplier from 2 to 2.5 

percent—an increase of 25 percent.25

Lower funded ratios generally mean higher annual contribution rates are 

necessary to help sustain pension plans. Thus, as funded ratios trended 

lower over the past decade, sponsor contribution rates trended higher. 

For example, from 2002 to 2009, the median government sponsor 

contribution rates among large plans rose as a percentage of payroll, 

while employee contribution levels remained the same through this same 

period (see table 3).

This higher benefit formula applied 

to both new and currently employed pension plan members (covering 

state employees and local public school employees). This was also the 

case in California and Colorado where pension benefit increases in the 

late 1990s and early in the 2000s helped drive liabilities higher.

Table 3: Median Contribution Rates for Large Plans as a Percentage of Payroll

2002 2009

Plans not participating in Social Security Employer 10.3% 12.7%

Employee 8 8 

Plans participating in Social Security Employer 6 9.4

Employee 5% 5%

Source: National Association of State Retirement Administrators.

In spite of budget pressures through the 2007-2009 recession, most 

government sponsors of large plans continued to contribute about the 

same percentage of their annual required contribution (ARC) levels 

 

24See Ronald Snell, NCSL, Pensions and Retirement Plan Enactments in 2001 State 

Legislatures (2001).

25Soon after Pennsylvania increased benefits, the state also changed its actuarial 

methods to amortize gains more quickly than losses, effectively suppressing the employer 

contribution rate over the subsequent 10-year period, according to plan officials.

Actuarially Determined 

Contribution Rates Trending 

Higher 
 

Page 16 GAO-12-322 State and Local Pensions

determined to be needed to help sustain their fund assets.26 From 2005 

until 2009, just under two-thirds of large plan sponsors continued to pay 

at least 90 percent of their ARC payments.27

In addition, the distribution of plan sponsor contribution levels in 2010, 

illustrated in figure 6, shows that about half the sponsors of large plans 

contributed their full 100 percent or more of ARC payments, while others 

contributed much less.

However, the gap in dollars 

between what large plans would have received, in aggregate, if they 

received their full ARC payments is significant. For example, in 2009, 

large plans sponsors contributed approximately $63.9 billion in aggregate, 

$10.7 billion less than if they had made their full ARC payments.

Figure 6: Distribution of Percentage of ARC Paid for Large Plans, Fiscal Year 2010

 

26A government sponsor may provide a lower percentage of the ARC from one year to the 

next, yet its contribution, in dollars, may be higher than the previous year’s amount. This is 

significant from a budgeting perspective because of the year-to-year increase.

27This level had fallen since 2001, when 9 of every 10 large plan sponsors were paying at 

least 90 percent of their ARCs. 
 

Page 17 GAO-12-322 State and Local Pensions

Going forward, among the eight selected states and eight selected local 

jurisdictions we reviewed, several officials told us that they expected 

significant increases in their employer contribution rates as a percentage 

of payroll. For instance, officials from the Employees’ Retirement System 

of Georgia expect their contribution rates to nearly double over the next 5 

years (from 10.5 to 20 percent of payroll) to help maintain a sustainable 

path for their defined benefit plans. Officials from the Utah Retirement 

Systems expect rates to increase from approximately 13 to 20 percent of 

payroll.

Fiscal pressures on state and local governments’ budgets add to the 

challenges faced by plan sponsors and their ability to make adequate 

contributions to their pension plans. The economic downturn and slow 

recovery led to budget shortfalls in the state and local sectors because of 

declining tax revenues and increased spending on economic safety net 

programs such as health care and social services. According to survey 

data from the National Association of State Budget Officers (NASBO), 

from fiscal years 2009 through 2011, states reported solving nearly $230 

billion in gaps between projected spending and revenue levels.28 Local 

governments have also struggled with their budgets. For example, the 

National League of Cities reported that if all city budgets were totaled 

together, they would likely face a combined estimated shortfall of 

anywhere from $56 billion to $83 billion from 2010 to 2012.29

As a result, higher pension contributions have been needed at the same 

time state and local governments have faced added pressures to balance 

their budgets. Even in normal economic times, state and local 

governments seek consistency in program spending areas, meaning that 

large year-to-year increases in pension contribution levels can strain 

 

28NASBO, Fiscal Survey of States: Spring 2011 (Washington, D.C.: 2011). In addition, 

NASBO notes that one of the clearest signs of fiscal stress is the need for states to make 

midyear budget cuts to help balance their budgets. Survey responses indicate that 43 

states made such reductions in fiscal year 2009, and 39 states did so in fiscal year 2010.

29As an indication of extreme fiscal stress among local governments, a small number have 

filed for bankruptcy: 4 filed in 2008, 10 in 2009, 6 in 2010, and 4 as of June 2011. Since 

1937, when the municipal bankruptcy code was instituted, there have been 624 filings as 

of June 30, 2011, according to an expert’s analysis of municipal bankruptcy filings. See 

James E. Spiotto, “The Myth and Reality of State and Local Governments Debt Financing 

in the U.S.A. in Times of Financial Emergency,” (July 25, 2011). Available on the U.S. 

Securities and Exchange Commission website.

Plans Are Vulnerable to 

Pressures on State and 

Local Budgets
 

Page 18 GAO-12-322 State and Local Pensions

budgets. Since some of these governments are subject to balanced 

budget requirements, annual pension contributions, which averaged 

around 4 percent of state and local budgets in fiscal year 2008, must 

compete with other pressing needs, even though pension costs are 

obligations that governments must eventually pay.30

Although tax revenues are slowly recovering to pre-2008 levels, going 

forward, long-term budget issues will likely continue to stress state and 

local governments and their ability to fund their pension programs. GAO 

has reported that state and local governments face fiscal challenges that 

will grow over time, and with current policies in place, the sector’s fiscal 

health is projected to decline steadily through 2060.31 The primary factor 

driving this decline is the projected growth in health-related costs. For 

example, GAO simulations show that the sector’s health-related costs will 

be about 3.7 percent of gross domestic product in 2010, but grow to 8.3 

percent by 2060.32 These fiscal pressures, combined with growing 

pension contribution rates, have spurred many states and localities to 

take action to reduce pension costs and improve the future sustainability 

of their plans.

States and localities have implemented various changes to their pension 

systems since the 2008 economic downturn—changes that, according to 

officials, were intended to help manage costs and improve plan 

 

30Provisions in state constitutions, statutes, or recognized legal protections under common 

law often protect pensions from being eliminated or diminished for current or retired 

members. In a few rare exceptions, some jurisdictions have avoided paying promised 

benefits. This can happen in cases of government bankruptcy or when legislative changes 

to reduce benefits are made retroactively and survive any legal challenges.

31GAO, State and Local Governments' Fiscal Outlook: April 2011 Update, GAO-11-495SP

(Washington, D.C.: Apr. 6, 2011).

32To provide more flexibility in addressing the growing cost of government employee’ 

retiree health care, state and local jurisdictions have begun to prefund these costs. With 

prefunding, governments can reduce the unfunded liability reported in their financial 

statements, take advantage of the compounding effects of investment returns on plan 

assets, and provide greater benefit stability for employees and retirees. In addition, by 

setting aside funds for this purpose in advance, government contributions can be reduced 

when fiscal pressures are great. However, prefunding retiree health benefits requires 

higher contributions in the short term than pay-as-you-go financing requires. For further 

discussion of this topic, see GAO, State and Local Government Retiree Health Benefits: 

Liabilities Are Largely Unfunded, but Some Governments Are Taking Action, GAO-10-61, 

(Washington, D.C.: Nov. 30, 2009). 

States and Localities 

Have Made Changes 

to Reduce Costs and 

Improve Plan 

Sustainability 
 

Page 19 GAO-12-322 State and Local Pensions

sustainability long term (see fig. 7). Based on our tabulation of state 

legislative changes reported annually by NCSL, we found that the 

majority of states have modified their existing defined benefit systems to 

reduce member benefits, lowering future liabilities. Half of states have 

increased required member (that is, employee) contributions, shifting 

costs to employees. Only a few states have adopted primary plans with 

defined contribution components, which reduce plan sponsors’ 

investment risk by shifting it to employees. Some states and localities 

have also taken action to lower pension contributions in the short term by 

changing actuarial methods, and a few have issued pension bonds to 

finance their contributions or to lower their costs by reducing the gap 

between plan assets and liabilities. In general, we found that states and 

localities often package several of these different pension changes 

together. These packaged changes can have varying effects on employer 

contributions, plan sustainability, and employees’ retirement security.33

Figure 7: Notable Changes to State-Sponsored Pension Plans, January 2008–June 2011

 

33See appendix I for a summary of the recent pension changes implemented in the eight 

states and eight localities we reviewed.
 

Page 20 GAO-12-322 State and Local Pensions

Since the economic downturn in 2008, 35 states have modified at least 

one state-sponsored defined benefit system to reduce member benefits 

and lower future pension liabilities, according to our analysis of NCSL 

annual reports on recent pension legislation.34

• Adjusting pension benefit formula. Since 2008, 24 states have 

adjusted the defined benefit formulas to reduce benefits by expanding 

the time period for calculating final average salary or lowering the 

percentage of final average salary multiplied by years of service for 

determining benefits.

States and localities have 

used various strategies to reduce benefits for plan participants, such as 

adjusting the benefit formula, raising eligibility requirements, and limiting 

postretirement benefit increases:

35

• Raising eligibility requirements. Since 2008, 29 states have 

increased retirement age or vesting requirements for plan 

participants.

For example, California recently lowered the 

benefit multiplier for new state safety employees, many of whom are 

not covered by Social Security, from 2.5 to 2 percent. In addition, two 

localities we reviewed made similar changes. For example, Denver, 

Colorado, increased the period used for calculating final average 

salary from 3 to 5 years for new members of the Denver Employees 

Retirement Plan.

36

• Limiting postretirement benefits. Since 2008, 18 states have 

reduced or eliminated annual postretirement cost-of-living 

adjustments (COLA). Some states have even applied these changes 

For example, Missouri raised the normal retirement age 

for general employees from 62 to 67 and lengthened the vesting 

period from 5 to 10 years for new members of the State Employees’ 

Retirement System and the Missouri Department of Transportation 

and Highway Patrol Employees’ Retirement System. In addition, two 

localities we reviewed made similar changes. For example, the normal 

retirement age for new members of the Policemen’s Annuity and 

Benefit Fund of Chicago was raised from 50 to 55 years.

 

34This analysis is based on our review of annual NCSL reports for the years 2008-2010 

and a 2011 report that covered changes adopted by June of that year.

35Expanding the time period for calculating final average salaries generally reduces 

pension benefits by averaging in lower employee salaries.

36The vesting period is the employees’ required years of service before they earn the right 

to future pension benefits.

Majority of States Have 

Reduced Benefits since 

2008, Reducing Future 

Liabilities
 

Page 21 GAO-12-322 State and Local Pensions

to current retirees. In the case of Colorado, the state recently reduced 

postretirement COLAs for future, current, and retired members. 

According to plan documents, most plan members, who are not 

covered by Social Security, had previously been guaranteed an 

annual postretirement COLA of 3.5 percent, but the recent legislation 

eliminated the COLA for 2010 and capped future COLAs at 2 

percent.37

The majority of these benefit changes have been limited to new 

employees, slowing the future growth of pension liabilities, but usually not 

significantly reducing systems’ existing unfunded liabilities, which are 

based on the benefits promised to current employees and retirees.38 As 

we have reported previously, provisions in state constitutions, statutes, or 

recognized legal protections under common law often protect pensions 

from being eliminated or diminished for current or retired members.39

Thus, some state and local governments change benefits by creating a 

new tier or plan that applies to new employees hired only after the date of 

the change, and sometimes also to newer employees who are not yet 

vested. It takes time for these new employees with less expensive 

pension benefits to become a significant portion of the workforce, 

delaying for a decade or more any significant reductions in plan 

liabilities.40

 

37Prior to the 2010 legislation, the amount of postretirement COLAs depended on when 

employees joined the system, according to plan documents. The COLA amount was 3.5 

percent for members who joined on or before June 30, 2005, and the lower of 3 percent or 

the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for 

members who joined on or after July 1, 2005. The 2010 legislation lowered the COLA for 

all future, current, and retired members. For members who joined before January 1, 2007, 

the COLA was reduced to 2 percent unless the plan has a negative investment return 

year, in which case the COLA will be the lesser of 2 percent or the CPI-W for the next 

three years. A separate reserve fund was created for members who joined on or after 

January 1, 2007. For these members, the COLA will be the lesser of 2 percent or the CPIW as long as payments do not exceed 10 percent of the COLA reserve fund. The 

legislation also allows for the maximum COLA to be increased when the plan’s overall 

funded status is at or above 103 percent and lowered if it subsequently drops below 90 

percent. 

Over the long term, however, these benefit reductions can 

38As discussed later, Illinois took the more unusual step of taking advance credit for 

benefit reductions that apply only to new employees.

39GAO, State and Local Government Retiree Benefits: Current Status of Benefit 

Structures, Protections, and Fiscal Outlook for Funding Future Costs, GAO-07-1156

(Washington, D.C.: Sept. 24, 2007). 

40Employers with higher rates of employee turnover will recognize savings from pension 

benefit reductions sooner than those employers with less employee turnover. 
 

Page 22 GAO-12-322 State and Local Pensions

reduce pension liabilities and consequently lower actuarially required 

sponsor contributions. From the employee perspective, these changes 

can mean that those in the new tier or plan will realize lower future 

benefits than their coworkers who continue to participate in the old plan. 

This could affect employee recruitment and retention over the long term, 

but some pension officials we spoke with expected any short-term 

impacts to be minimal.

Among the pension plans included in our review, we found that six states 

and two localities had reduced the benefits in some of their largest 

defined benefit plans. For example, in 2011, Denver, Colorado, reduced 

retirement benefits for new members of the Denver Employees 

Retirement Plan hired after July 1, 2011. Denver reversed previous 

benefit enhancements enacted over prior decades by increasing the 

period used for calculating final average salary (the basis for benefit 

calculations) and raising the minimum retirement age from 55 to 60, 

among other changes. Over the next 30 years, these changes are 

expected to reduce the city’s pension contributions by 1.65 percent of 

payroll. According to plan documents, the changes enacted are expected 

to reduce pension benefits for new employees and will require some 

members to work longer to receive full pension benefits. Nevertheless, 

city officials do not expect any of the recent changes to significantly affect 

employee recruitment and retention.

Twenty-five states have taken action since 2008 to increase member 

contributions, shifting pension costs to employees, according to NCSL 

reports. States generally have more leeway to adjust member contribution 

rates as compared with pension benefits for existing members. As a 

result, more states have increased contributions for some active 

employees rather than limiting the increases to future employees. Some 

states are also requiring members to contribute to their pensions for the 

first time. Among the states we reviewed, Virginia and Missouri recently 

required some new plan members to contribute to the retirement plan (5 

percent in Virginia and 4 percent in Missouri), whereas members did not 

previously contribute.

Increases in member contributions reduce the actuarially required 

amounts plan sponsors need to contribute to their pension systems. As a 

result, these changes often do not affect the amount of revenue flowing 

into pension systems, but rather represent a shifting of pension cost from 

employers to plan members. Member contributions are a relatively stable 

source of pension revenue, since they are less susceptible to market 

Half the States Have 

Raised Member 

Contributions, Shifting 

Costs to Plan Members
 

Page 23 GAO-12-322 State and Local Pensions

conditions than investment returns, and less susceptible to budgetary and 

political pressures than employer contributions. However, member 

contributions are susceptible to declines in the size of the workforce and 

are often refunded to employees if they separate from their employer 

before becoming eligible to receive benefits.

Among the jurisdictions included in our review, we found that four states 

and one locality had increased the member contributions in some of their 

largest defined benefit plans. For example, in the case of Norfolk, 

Virginia, the city began requiring new members to contribute 5 percent to 

the Employees’ Retirement System in 2010, whereas current members 

do not contribute. As a result of this change, the city’s employer 

contributions will decline as more contributing members join the system. 

City officials said that new employees had already contributed over

$140,000 to the system in the first year. This increase in member 

contributions will reduce employee compensation and could affect 

recruitment and retention, particularly since the change will be 

immediately reflected in lower paychecks. However, city officials did not 

expect the changes to have a significant impact on employee recruitment 

and retention, since the Virginia Retirement System had recently 

implemented similar changes for state employees.

Although a majority of states have continued to use traditional defined 

benefit plans as their primary pension system, our analysis of NCSL 

annual reports on recent pension legislation found that, since 2008, three 

states—Georgia, Michigan,41 and Utah—have implemented hybrid 

approaches as primary plans for large groups of employees,42

 

41Michigan has operated a defined contribution plan for general employees since 1997, 

but adopted a new hybrid system for public school employees in 2010. 

shifting 

42Prior to 2008, three states, Alaska, Indiana, and Oregon, and the District of Columbia 

had already adopted defined contribution or hybrid approaches as their primary plans for 

general public employees. Indiana has operated a hybrid system since 1997, but adopted 

a defined contribution option for new employees in 2011. In addition, Nebraska maintains 

a cash balance defined benefit plan as its primary plan. Although still providing defined 

benefit plans as their primary plans for general state employees, some states also offer 

defined contribution plans or hybrid approaches as optional alternatives to their primary 

plans. These states include Colorado, Florida, Montana, Ohio, South Carolina, and 

Washington.

Three States Recently 

Adopted Hybrid 

Approaches, Reducing 

Risk for Plan Sponsors
 

Page 24 GAO-12-322 State and Local Pensions

some investment risk to new employees.43 Two of the eight localities we 

reviewed have also switched to hybrid approaches since 2008: Cobb 

County, Georgia, and Bountiful, Utah (which participates in Utah’s stateadministered retirement system). Unlike in a defined benefit plan, which 

provides benefits based on a set formula,44

Defined contribution and hybrid approaches reduce the impact of market 

volatility on plan funding and employer contributions, but are riskier for 

plan members. Whereas under a defined benefit system, employer 

contributions generally rise and fall depending in part on investment 

returns, plan sponsors of a defined contribution system contribute a set 

amount regardless of investment returns. This reduces the risk facing the 

pension system as well as the state or locality sponsoring the plan. 

However, switching to a defined contribution plan can involve additional 

short-term costs for plan sponsors, since contributions from new 

employees go toward their own private accounts rather than paying off 

existing unfunded liabilities of the defined benefit plan once it is closed to 

new employees. From the member’s perspective, building up retirement 

savings in defined contribution plans rests on factors that are, to some 

degree, outside of the control of the individual worker. Most notable 

among these is the market return on plan assets, which, among other 

factors, determines future retirement benefits. On the one hand, this 

exposure to market risk increases members’ financial uncertainty, since 

retirement benefits rise and fall based on investment returns. On the other 

hand, defined contribution plans are often viewed as more portable than 

defined benefit plans, as employees own their accounts individually and 

can generally take their balances with them—including both member and 

in a defined contribution 

component of a hybrid approach, the key determinants of the benefit 

amount are the employee’s and employer’s contribution rates, and the 

rate of return achieved on the amounts contributed to an individual’s 

account over time.

 

43In this report we use the term “hybrid approach” to refer to public pension systems that 

combine defined benefit and defined contribution components. In the private sector, a 

hybrid plan most often refers to a cash balance plan, which is legally a defined benefit 

plan that expresses benefits as a hypothetical individual account balance that is based on 

pay credits (percentage of salary or compensation) and interest credits. For additional

information on private sector cash balance plans, see GAO, Private Pensions: Information 

on Cash Balance Pension Plans, GAO-06-42 (Washington, D.C.: Nov. 3, 2005).

44In a public sector defined benefit plan, the amount of the benefit is determined by a 

formula typically based on the retiree’s years of service and final average salary.
 

Page 25 GAO-12-322 State and Local Pensions

employer contributions—when they leave government employment, as 

long as they are vested. In contrast, employees in defined benefit plans 

can generally take their member contributions, if any, with them if they 

leave government employment, but not the employer’s contributions. 45

In the case of Georgia, the state replaced its defined benefit plan with a 

hybrid approach for all new employees hired after January 1, 2009. This 

new hybrid approach is composed of a smaller defined benefit relative to 

the previous plan (1 percent of highest average salary multiplied by years 

of service compared with 2 percent previously) and automatic enrollment 

in the state’s 401(k) plan with the state matching up to 3 percent of the 

employee’s contributions.46

 

45Once an employee is vested, both defined contribution and defined benefit plans could 

be regarded as “portable.” In the case of a defined benefit plan, the departing employee 

takes with him or her the right to a future benefit, wherever he or she goes. However, the 

benefit formulas of defined benefit plans are often weighted toward employees that retire 

after many years of service with a single employer, so workers changing jobs may incur 

future lifetime benefit losses. The perception of defined contribution plans as more 

portable reflects the greater liquidity and employee discretion over the management of 

these benefits, such as the ability to cash them out upon leaving employment, or to roll 

them over into another plan or an individual retirement account. For additional information, 

see GAO, Private Pensions: Alternative Approaches Could Address Retirement Risks 

Faced by Workers but Pose Trade-offs, 

Plan officials said it is difficult to calculate how 

much the state will save as a result of the change, but it is expected to be 

financially advantageous for the state in the long run. In 2011, employer 

contributions for the defined benefit portion of the hybrid approach were 

6.54 percent of payroll, compared with 10.41 percent for employees 

covered under the old plan. However, since the changes are limited to 

new employees, it will take time for the state to realize significant savings 

from the change. According to plan officials, one of the motivating factors 

behind the switch to the hybrid approach was the desire to attract new 

employees to the state by providing them with more portable retirement 

benefits that mirrored those in the private sector. However, as is common 

with defined contribution plans in the private sector, some participants in 

the hybrid approach may not be saving enough for a secure retirement. 

As of December 31, 2011, 80 percent of employees participating in the 

GAO-09-642 (Washington D.C.: July 24, 2009).

46A 401(k) plan is a type of defined contribution plan that permits employees to defer a 

portion of their pay to a qualified tax-deferred plan. State and local government defined 

contribution plans are typically 457(b) plans. The Tax Reform Act of 1986 prohibited state 

and local governments from establishing any new 401(k) plans after May 6, 1986, but 

existing plans were allowed to continue. Pub. L. No. 99-514, § 1116(b)(3), 100 Stat. 2085, 

2455.
 

Page 26 GAO-12-322 State and Local Pensions

401(k) component of the hybrid approach were contributing only the 

default 1 percent, according to plan officials. At this level, employees may 

struggle to build adequate retirement savings. Plan officials said they 

have tried to encourage members to contribute more to their 401(k) plans, 

but these efforts have not been successful.

To address rising actuarially required pension contribution levels and 

budget pressures, some states and localities have taken actions to limit 

employer contributions in the short term or refinance their contributions.47

These strategies included changing actuarial methods or issuing pension 

bonds to supplement other sources of financing for pension plans. Such 

strategies help plan sponsors manage their contributions in the near term, 

but may increase their future costs. Fewer nationwide data are available 

on the use of these strategies; however, we were able to document their 

use across several of our selected pension plans.48

Some state and local governments have limited or deferred their pension 

contributions in the short term by making actuarial changes. It is difficult 

to determine the recent prevalence of these changes nationwide; 

however, five of the eight states and one of the localities we reviewed had 

implemented actuarial changes to reduce their pension contributions 

since 2008.49

 

47State and local plan sponsors can also address their pension finance challenges by 

adjusting their investment policy, particularly plan asset allocation, which is the third key 

mechanism, besides benefit policy and funding policy, that plan sponsors have in 

attempting to manage the amount, riskiness, and sustainability of their pension costs. A 

less risky asset allocation can raise estimated costs but also make them less volatile; a 

more risky allocation can lower estimated costs but at the price of greater risk. We have 

previously reported that state and local plans have gradually changed their asset portfolios 

over many years by increasing their allocations in higher-risk investments partly in pursuit 

of higher returns. See GAO, State and Local Government Pension Plans: Governance 

Practices and Long-Term Investment Strategies Have Evolved Gradually as Plans Take 

On Increased Investment Risk, 

The changes included expanding amortization periods (the 

number of years allotted to pay off unfunded liabilities) and adjusting 

smoothing techniques (methods for reducing the effect of market volatility 

GAO-10-754, (Washington, D.C.: Aug. 24, 2010).

48Since implementation of actuarial changes sometimes does not require a legislative 

change, use of such strategies is not reflected in the NCSL annual reports of state 

legislative changes. As a result, our analysis of such changes is based on reviews of our 

selected states and localities rather than NCSL reports.

49In the states we reviewed, actuarial changes were implemented either by state 

legislation or by the pension plan boards.

Some States and Localities 

Have Adjusted Pension 

Funding Practices, 

Potentially Increasing 

Future Costs

Adjusting Actuarial Methods
 

Page 27 GAO-12-322 State and Local Pensions

on pension contributions by averaging asset values over multiple years).50

For example, Utah reported that it increased the amortization for the 

state’s retirement system from 20 years to 25 years to extend the length 

of time for paying down unfunded pension liabilities.51

Some state and local governments, while not formally changing their 

underlying actuarial methods, have simply deferred or capped their 

pension contributions. Two states and one locality we reviewed limited 

contributions in the short term by capping increases in employer 

contributions or by simply postponing otherwise scheduled contributions. 

Capping increases in contributions allowed these states and this locality 

to temporarily suppress the increases that would otherwise have been 

required given 2008 investment losses and other factors. In the case of 

the Pennsylvania, the state addressed an expected 19 percent increase 

in actuarially required contributions to the State Employees’ Retirement 

System by capping annual increases at 3 percent for 2012, 3.5 percent 

for 2013, and 4.5 percent thereafter. Similarly, the Illinois Municipal 

Retirement Fund allowed local plan sponsors to cap contribution 

increases at 10 percent starting in 2010.

Alternatively, Illinois 

reported that it recently required all Illinois state retirement systems to 

switch from a market valuation with no smoothing to a 5-year smoothing 

method for calculating actuarial assets and employer contributions to 

lessen the immediate impact of fiscal year 2009 investment losses on 

contributions.

Although adjusting plan funding produced some short-term savings for 

state and local budgets, it also increased the unfunded liabilities of the 

pension system and will necessitate larger contributions in the future. In 

the case of Philadelphia, the city used its authority under state law to 

partially defer pension payments by $150 million in fiscal year 2010 and 

$90 million in 2011. While these deferrals helped the city reduce its 

contributions in the short term, state law requires that the money be 

 

50Other actuarial changes, such as reducing the assumed rate of investment returns, can 

increase actuarially required pension contributions. 

51Utah moved from an open 20-year amortization period (meaning that the amortization 

was frozen at 20 years) to a closed 25-year amortization period ( meaning that the 

amortization period will decrease annually by one year). As a result, Utah is currently at a 

23-year amortization period, and the period will continue to decrease annually unless its 

board takes action to change the amortization policy.

Capping or Postponing 

Employer Contributions
 

Page 28 GAO-12-322 State and Local Pensions

repaid with interest by fiscal year 2014. The city has adopted a temporary 

1 percent increase in the sales tax to help cover these future costs.52

Issuing pension obligation bonds (POB) is another funding strategy, 

although relatively few states and localities have used it, as it can expose 

plan sponsors to additional market risk. POBs are taxable general 

obligation bonds that provide a one-time cash infusion into the pension 

system. They convert a current pension obligation into a long-term, fixed 

obligation of the government issuing the bond. POBs are issued for 

generally one of two purposes: either to provide temporary budget relief 

by financing a plan sponsor’s actuarially required contribution for a single 

year, or as part of a longer-term strategy for paying off a plan’s unfunded 

liability. Using POBs to pay off all or a portion of a plan’s unfunded liability 

potentially reduces future actuarially required pension contributions, but 

requires plan sponsors to make annual debt service payments on the 

POBs instead.53

We analyzed data on state and local government bond issuances 

nationwide and found that other than the states of Illinois and 

Connecticut, and the Chicago Transit Authority, most state and local 

governments have not issued sizable POBs over the past 6 years (see 

fig. 8). This type of pension funding has been limited, with only 25 or 

fewer POB issuances in each of the last 6 years. The total amount of 

POBs issued in a single year has not exceeded more than 1 percent of 

total assets in state and local pension plans.

 

52Philadelphia was not the only locality we reviewed that used a temporary tax increase to 

cover pension contributions. In 2009, Springfield, Missouri approved a 0.75 cent sales tax, 

all of which will go toward funding the city’s Police Officers' and Firefighters' Retirement 

Fund.

53Issuing POBs can be a leveraging strategy, since funds are borrowed at a fixed interest 

rate and then invested in the stock market in an attempt to achieve a higher rate of return 

(arbitrage). 

Issuing Pension Obligation 

Bonds
 

Page 29 GAO-12-322 State and Local Pensions

Figure 8: Pension Obligation Bond Issuances Nationwide, January 2006–June 2011

These transactions involve significant risks for government entities 

because investment returns on the bond proceeds can be volatile and 

lower than the interest rate on the bonds. In these cases, POBs can leave 

plan sponsors worse off than they were before, juggling debt service 

payments on the POBs in addition to their annual pension contributions. 

In a recent brief, the Center for State and Local Government Excellence 

reported that by mid-2009, most POBs issued since 1992 were a net 

drain on government revenues.54

 

54Center for State and Local Government Excellence, Issue Brief: Pension Obligation 

Bonds: Financial Crisis Exposes Risks (Washington, D.C., January 2010).

In light of these concerns, officials in 
 

Page 30 GAO-12-322 State and Local Pensions

Pennsylvania noted that the state had enacted legislation in 2010 

prohibiting the use of POBs.55

Two of the pension systems included in our review—Illinois and Sonoma 

County, California—have issued POBs since 2008. Illinois, which is 

discussed at length below, has been the largest single issuer in recent 

years, issuing over $7 billion in POBs since 2010. In the case of Sonoma 

County, California, the county issued $289 million of POBs in 2010 with 

maturities ranging up to 19 years. County officials explained that the 

POBs were financially advantageous because they had an average 

interest rate of just under 6 percent, which is lower than the 8 percent 

expected return on the pension fund investments at the time the bonds 

were issued. The difference between the POB interest rates and the 

assumed rate of return is projected to save the county $93 million in 

contributions over the life of the bonds.56 However, results could vary 

significantly. The POBs could increase the county’s future expenses if 

actual investment returns fall below 6 percent. Over the prior 10-year 

period ending in 2010, the retirement system’s average investment rate of 

return was 4.1 percent, but returns over the prior 20-year period have 

been significantly higher at 8.4 percent.

States and localities often packaged multiple pension changes together. 

For example, our analysis of the NCSL reports revealed that 23 states 

have both increased employee contributions and reduced member 

benefits. Each change made, and the interplay among the changes, 

contributes to various impacts on plan sponsors, pension sustainability, 

and plan members. The following examples demonstrate some of the 

ways states have packaged these changes, and the varying impacts that 

are expected as a result.

 

55The provisions of Pennsylvania’s pension reform legislation (Act 2010-120), enacted in 

November 2010, are summarized in Commonwealth of Pennsylvania State Employees’ 

Retirement System, Comprehensive Annual Financial Report for the year ended 

December 31, 2010 (Harrisburg, PA: May 2011). The report describes the act’s provisions 

for reducing benefits for future plan members and for changing funding methods, and 

notes that the act also prohibits the use of pension obligation bonds for funding liabilities. 

24 Pa. C.S.A. § 8308 (2010).

56The county pension system subsequently lowered its assumed rate of return to 7.75 

percent. This action, along with any future actuarial changes, would affect the expected 

savings from the POBs.

States and Localities Often 

Combine Strategies
 

Page 31 GAO-12-322 State and Local Pensions

Missouri is an example of a state that packaged increases in member 

contributions with reductions in benefits to narrow the gap between plan 

assets and liabilities. For new general members of the Missouri State 

Employees Retirement System and the Missouri Department of 

Transportation and Highway Patrol Employees’ Retirement System, the 

state increased the normal retirement age from 62 to 67, expanded the 

vesting period from 5 to 10 years, and required members to contribute 4 

percent of pay to the pension system, although current members do not 

contribute. These changes are expected to lower the state’s contributions 

to the system over the long run by more than 5 percent of payroll, but the 

initial savings are much smaller. In fiscal year 2012, the benefit and 

contribution changes are expected to reduce the state’s contribution to its 

largest plan by less than 1 percent of payroll, since there will be only a 

small number of newly hired members in the system. However, by fiscal 

year 2018, employees covered under the reduced benefit structure are 

expected to account for over half of payroll, further reducing the state’s 

annual contributions. Plan officials said these changes could pose issues 

for recruitment and retention, although the influence of retirement plan 

details will vary based on individual circumstances. They also noted that 

the changes could affect employee morale, since new employees will 

have to work longer to qualify for benefits and the required pension 

contributions will reduce their compensation.

In the case of Pennsylvania, the state passed a package of pension 

changes in 2010 that offset a short-term funding cap with long-term 

benefit reductions to limit the impact on the plan’s funded status. For the 

State Employees’ Retirement System, the most significant funding 

change was a statutory cap on employer contribution rate increases. The 

legislation addressed an expected 19 percent increase in actuarially 

required contributions by capping any increases at 3 percent for fiscal 

year 2011/2012, 3.5 percent for fiscal year 2012/2013, and 4.5 percent 

thereafter. In the short term, the caps effectively reduced the state’s 

expected contributions over the next 4 years by $2.5 billion. But in the 

long term, the caps, along with other actuarial changes, are expected to 

increase the state’s pension contributions to the system by $7 billion over 

the next 32 years. To help offset the additional long-term costs, 

Pennsylvania enacted pension legislation calling for various benefit 

reductions for future employees. For example, the state reduced the 

benefit multiplier for future employees from 2.5 to 2 percent (with an 

option for members to maintain the 2.5 multiplier by paying a higher 

member contribution rate); increased the normal retirement age from 60 

to 65; and expanded the vesting period from 5 to 10 years. These benefit 

reductions will reduce future liabilities and are expected to lower the 

Reducing Benefits and 

Increasing Contributions for 

New Members 

Combining Short-Term Funding 

Adjustments with Longer-Term 

Benefit Reductions
 

Page 32 GAO-12-322 State and Local Pensions

state’s pension costs by almost $8.5 billion over the next 32 years, for an 

estimated net savings of $1.5 billion over the cost of the caps and other 

funding adjustments. Both pension and budget officials said these 

changes will help the state better manage rising pension contributions in 

the short term, but the overall savings from the legislative package are 

relatively modest over the long term. Meanwhile, the changes will require 

new employees to work longer for lower benefits and will leave more 

employees with no benefit at all. Plan officials said it is too early to tell if 

this will affect employee recruitment and retention. 57

In the case of Illinois, the state combined use of POBs, actuarial changes, 

and benefit reductions to manage the state’s pension costs. The state 

issued $3.5 billion of POBs in 2010 and $3.7 billion in 2011 with 

maturities up to 8 years and used the proceeds to fund the state’s annual 

contributions to various pension systems. An Illinois budget official 

explained that issuing the POBs helped the state avoid making additional 

spending cuts to other portions of the state’s budget. Alternatively, given 

the state’s budgetary challenges, some pension officials said that if the 

state had not issued the POBs, it is more likely that it would have not paid 

its full required pension contributions.

Use of POBs will be costly to Illinois, since the state will face annual debt 

service payments of about $1 billion over the next 9 years. However, the 

state increased individual and corporate taxes in 2010 and state budget 

officials told us the state plans to use the additional revenue to fund these 

debt service payments as well as other budgetary priorities. Whether the 

state’s statutorily required contributions are funded through POBs or 

general revenue does not directly affect the financial condition of the 

pension system. However, some pension officials were concerned that 

the debt service payments on the POBs would reduce available funding 

for future pension contributions.

Illinois has also lowered employer contributions to the state’s pension 

systems in the short term by adjusting actuarial methods. In 2009, the 

state required its pension systems to switch from a market value (no 

smoothing) to a 5-year smoothing method for calculating actuarial assets 

 

57The expanded vesting requirement, from 5 years to 10, would mean that more 

employees would leave service with no benefit at all, except for a return of member 

contributions. In the private sector, 5-year vesting has been the standard for defined 

benefit plans since 1986.

Managing Funding through 

POBs, Actuarial Changes, and 

Benefit Reductions
 

Page 33 GAO-12-322 State and Local Pensions

and employer contributions. Plan officials explained that the change was 

intended to reduce the state’s contributions and dampen the impact of 

fiscal year 2009 market losses for the short term. As a result of the 

change, the state’s actuarially calculated contribution to the State 

Employees’ Retirement System of Illinois was reduced by $100 million in 

the first year, according to plan officials. However, plan actuaries noted 

that this strategy only defers contributions when plan assets experience a 

loss, as they did in fiscal year 2009. Future contributions will be higher 

than they would have been previously once the fiscal year 2009 market 

losses are fully recognized.

In addition to the use of POBs and actuarial changes, Illinois also reduced 

benefits for new employees and applied the future savings to reduce 

employer contributions in the short term. For example, the state raised 

new employees’ normal retirement age to 67, capped final average 

salaries used for pension purposes, and reduced annual COLAs.58

According to plan officials, these changes are expected to reduce the 

State Employees’ Retirement System’s future liabilities by a third. State 

budget officials said the projected total estimated savings for the state 

over the next 35 years will be about $220 billion. Since the changes apply 

only to new employees, the savings will slowly accrue over the next 35 

years. Nevertheless, the state took advanced credit for these future 

benefit reductions, further reducing contributions in the short term. 

According to plan actuaries, by taking this advance credit, the state also 

increased unfunded liabilities in the short term, adversely affecting its 

retirement systems.

State and local governments continue to experience the lingering effects 

of investment losses and budget pressures in the wake of the recent 

economic downturn. Although most large state and local government 

pension plans still maintain substantial assets, sufficient to cover their 

pension obligations for a decade or more, heightened concerns over the 

long-term sustainability of the plans has spurred many states and 

localities to implement a variety of reforms, including reductions in 

benefits and increases in member contributions.

 

58According to plan officials, capping salaries used for benefit calculations and for 

determining contributions decreases the anticipated amount of future payroll and 

employee contributions, which affects future state contributions.

Concluding 

Observations 
 

Page 34 GAO-12-322 State and Local Pensions

Despite these efforts, continued vigilance is needed to help ensure that 

states and localities can continue to meet their pension obligations. 

Several factors will ultimately affect the sustainability of state and local 

pension plans over the long term. Important among them are whether 

government sponsors maintain adequate contributions toward these 

plans, and whether investment returns meet sponsors’ long-term 

assumptions. Going forward, growing budget pressures will continue to 

challenge state and local governments’ abilities to provide adequate 

contributions to help sustain their pension plans and ensure a secure 

retirement for current and future employees.

We provided officials from the Internal Revenue Service and the Social 

Security Administration with a draft of this report. They provided technical 

comments that we incorporated, as appropriate. In addition, we provided 

officials from the states and cities we reviewed with portions of the draft 

report that addressed aspects of the pension funds in their jurisdictions. 

We incorporated their technical comments, as appropriate, as well. 

We are sending copies of this report to relevant congressional 

committees, the Commissioners of the Internal Revenue Service and the 

Social Security Administration, and other interested parties. In addition, 

this report will be available at no charge on GAO’s website at 

http://www.gao.gov. 

Agency Comments
 

Page 35 GAO-12-322 State and Local Pensions

If you have any questions concerning this report, please contact Barbara 

D. Bovbjerg at (202) 512-7215 or Stanley J. Czerwinski at (202) 512-

6806. Contact points for our Office of Congressional Relations and Public 

Affairs may be found on the last page of this report. GAO staff who made 

major contributions to this report are listed in appendix III.

Barbara D. Bovbjerg

Managing Director, Education, Workforce,

 and Income Security Issues

Stanley J. Czerwinski

Director, Strategic Issues
Page 36 GAO-12-322 State and Local Pensions

Appendix I

Methodology

We reviewed a small judgmental sample of plans from eight states, and 

one locality within each of these states, that have implemented pension 

modifications since 2008. This judgmental sample was selected to 

provide examples of plans experiencing a range of financial conditions 

and types of strategies adopted by their sponsors. The profiles on the 

following pages are based on information from the U.S. Census Bureau, 

Social Security Administration, pension plan documents (including

Comprehensive Annual Financial Reports (CAFR)), and interviews with 

state and local government officials. At each location, we interviewed 

budget officials and pension plan administrators, and obtained 

documents describing recent changes to their plans. The descriptions of 

recent pension reforms included here highlight notable changes given the 

scope of our review; they are not intended to provide a comprehensive 

list of every change implemented by each state or locality. We did not 

conduct an independent legal review of any state or local laws in 

compiling this appendix. 

State and Local Jurisdictions Selected for Review

• California and Sonoma County

• Colorado and the City of Denver

• Georgia and Cobb County

• Illinois and the City of Chicago

• Missouri and the City of Springfield

• Pennsylvania and the City of Philadelphia

• Utah and the City of Bountiful

• Virginia and the City of Norfolk

Overview of nationwide 

state and local retirement 

systems (FY 2009)

Number of plans: 3,418

• State plans: 222

• Local plans: 3,196

Active members: 14,829,943

• State plans: 13,112,318

• Local plans: 1,717,625

Beneficiaries: 7,990,405

• State plans: 6,751,285

• Local plans: 1,239,120

Percentage of members covered 

by Social Security: 73 

Assets (thousands): 

 $2,465,959,589

• State plans: $2,029,509,728

• Local plans: $436,449,861

Contributions (thousands)

• Employees: $39,511,586

• State government: $35,509,035

• Local government:$50,611,000

Source: GAO analysis of most recent Census

and Social Security data.

Note: Census categorizes plans as state or local based on 

their level of administration, not sponsorship. 

Profiles of Selected State and Local 

Government Pensions
Page 37 GAO-12-322 State and Local Pensions

Appendix I

Selected state-sponsored plans

Plan basics

California Public Employees’

Retirement System (CalPERS)

California State 

Teachers’ Retirement 

System

As of June 30, 2011

Active members 791,219 429,600

Beneficiaries 536,234 253,041 

Members covered by Social 

Security?

Varies by plan No

Net assets (thousands) $241,761,791 $155,345,815

Contributions: Employees 

 (thousands) Employers

$3,600,089

$7,465,397

$2,355,909

$3,503,615*

Source: GAO analysis of most recent plan CAFRs.

*This also includes government contributions

Benefit reductions: The state reduced benefits for new members of 

CalPERS hired on or after January 15, 2011, including

• raising the normal retirement age from 55 to 60 for general 

state employees and from age 50 to 55 for members of the 

state highway patrol, 

• reducing the benefit multiplier from 2.5 to 2 percent for state 

safety employees, and

• increasing the period for calculating final average salary from 

1 year to 3 years.

Member contributions: In fiscal year 2010-2011, most CalPERS 

member contributions increased by between 2 and 5 percent of 

compensation, depending on the type of employee.

Funding changes: The CalPERS board temporarily adjusted the 

actuarial smoothing methods for the system’s plans from 2009 to 2011 to 

reduce the effects of investment losses.

Selected locally-sponsored plan 

Plan basics

Sonoma County Employees’ Retirement 

Association

As of December 31, 2010

Active members 3,780

Beneficiaries 3,780

Members covered by Social Security? Yes

Net assets (thousands) $1,752,819

Contributions: Employees

 (thousands) Employers

$37,322

$337,761* 

Source: GAO analysis of most recent financial report.

*This includes $289.3 million in pension obligation bond proceeds.

 

Funding changes: The county issued $289 million of pension obligation 

bonds (POB) in September 2010 at an interest rate of 5.51 percent to 

pay down the plan’s unfunded liability. 

Overview of California state 

and local retirement 

systems (FY 2009)

Number of plans: 62

• State plans: 5

• Local plans: 57

Active members: 1,767,618

• State plans: 1,396,440

• Local plans: 371,178

Beneficiaries: 1,017,122

• State plans: 779,637

• Local plans: 237,485

Percentage of members covered 

by Social Security: 44 

Assets (thousands): $470,140,330

• State plans: $340,161,617

• Local plans: $129,978,713

Contributions (thousands) 

• Employees: $18,217,580

• State government: $4,426,716

• Local government:$10,785,868

Source: GAO analysis of most recent Census

and Social Security data. 

Note: Census categorizes plans as state or local based on 

their level of administration, not sponsorship. 

Profiles of Selected State and Local 

Government Pensions

California and Sonoma County
Page 38 GAO-12-322 State and Local Pensions

Appendix I

Selected state-sponsored plans

Plan basics

Colorado Public Employees’ Retirement 

Association

As of December 31, 2010

Active members 201,095

Beneficiaries 94,017

Members covered by Social Security? No

Net assets (thousands) $38,405,701

Contributions: Employees 

 (thousands) Employers

$668,131

$908,330

Source: GAO analysis of most recent plan CAFRs.

Benefit reductions: In 2010, the state reduced postretirement cost-ofliving adjustments (COLA) for future, current, and retired members. The 

COLA was set to zero for 2010, and future COLAs were set at 2 percent, 

unless the plan has a negative investment return year, in which case the 

COLA will be the lesser of 2 percent or the Consumer Price Index for

Urban Wage Earners and Clerical Workers (CPI-W) for the next 3 years. 

Prior to the change, most plan members had been guaranteed an annual 

postretirement COLA of 3.5 percent. 

Member contributions: For fiscal years 2011 and 2012, the state 

temporarily increased member contributions by 2.5 percent of 

compensation and reduced employer contributions by the same amount.

Selected locally-sponsored plan 

Plan basics Denver Employees Retirement Plan

As of December 31, 2010

Active members 8,403

Beneficiaries 7,606

Members covered by Social Security? Yes

Net assets (thousands) $1,802,143

Contributions: Employees

 (thousands) Employers

$23,090

$45,153

Source: GAO analysis of most recent financial report.

 

Benefit reductions: In 2011, the city adopted several benefit reductions 

for new employees hired on or after July 1, 2011, including

• increasing the minimum retirement age from 55 to 60, 

• increasing the age and service requirements needed to qualify for 

an unreduced early retirement, and

• increasing the period used for calculating final average salary 

from 3 to 5 years.

Overview of Colorado state 

and local retirement 

systems (2009)

Number of plans: 67

• State plans: 2 

• Local plans: 65

Active members: 223,636

• State plans: 201,524

• Local plans: 22,112

Beneficiaries: 103,134

• State plans: 87,174

• Local plans: 15,960

Percentage of members covered 

by Social Security: 30 

Assets (thousands): $37,072,374

• State plans: $31,969,762

• Local plans: $5,102,612

Contributions (thousands) 

• Employees: $658,087

• State government: $313,999

• Local government: $1,121,023

Source: GAO analysis of most recent Census

and Social Security data.

Note: Census categorizes plans as state or local based on 

their level of administration, not sponsorship. 

Profiles of Selected State and Local 

Government Pensions

Colorado and the City of Denver
Page 39 GAO-12-322 State and Local Pensions

Appendix I

Selected state-sponsored plans

Plan basics

Employees’ Retirement System of 

Georgia

As of June 30, 2011

Active members 134,487

Beneficiaries 55,929

Members covered by Social Security? Most (varies by plan)

Net assets (thousands) 15,479,714

Contributions: Employees 

 (thousands) Employers

$121,742

297,763

Source: GAO analysis of most recent plan CAFRs.

Hybrid approach: In 2008, the state adopted a hybrid approach for new 

employees hired after January 1, 2009, that combines defined benefit 

and defined contribution components.

• Defined benefit portion: The plan has a 10-year vesting period 

with a benefit formula based on 1 percent of highest average 

salary multiplied by years of service. 

• Defined contribution portion: Members receive a 1 percent 

contribution match from state on the first 1 percent they contribute 

to the 401(k) plan. The state then matches half of each additional 

percent contributed by members up to a total maximum state 

match of 3 percent (based on an employee contribution of 5 

percent). However, as of December 31, 2011, about 10 percent of 

new members have opted not to participate in this part of the 

plan.

Selected locally-sponsored plan 

Plan basics 

Cobb County Employees’ Retirement System 

Pension Plan

As of September 30, 2010

Active members 4,242*

Beneficiaries 1,490*

Members covered by Social Security? Yes

Net assets (thousands) 356,696

Contributions: Employees

 (thousands) Employers

$10,896

$27,068

Source: GAO analysis of most recent financial report.

*As of January 1, 2010

Hybrid approach: In 2009, the county adopted a hybrid approach for 

new employees hired on or after January 1, 2010, and for nonvested 

employees who elect to join the plan. Similar to the state’s new hybrid 

plan, the defined benefit portion of the plan has a 10-year vesting period 

with a benefit formula based on 1 percent of highest average salary 

multiplied by years of service. The defined contribution component of the 

plan is voluntary, but the county matches half of the member’s 

contribution up to 2 percent. 

Overview of Georgia state 

and local retirement 

systems (FY 2009)

Number of plans: 34

• State plans: 9

• Local plans: 25

Active members: 392,668

• State plans: 365,274

• Local plans: 27,394

Beneficiaries: 155,462

• State plans: 140,046

• Local plans: 15,416

Percentage of members covered 

by Social Security: 74 

Assets (thousands): $60,462,340

• State plans: $54,830,465

• Local plans: $5,631,875

Contributions (thousands)

• Employees: $680,508

• State government: $1,061,525

• Local government: $579,042

Source: GAO analysis of most recent Census

and Social Security data.

Note: Census categorizes plans as state or local based on 

their level of administration, not sponsorship. 

Profiles of Selected State and Local 

Government Pensions

Georgia and Cobb County
Page 40 GAO-12-322 State and Local Pensions

Appendix I

Selected state-sponsored plans

Plan basics

State Employees’ Retirement 

System of Illinois

As of June 30, 2010

Teachers’ Retirement 

System of the State of 

Illinois

As of June 30, 2011 

Active members 64,143 166,013

Beneficiaries 58,392 101,288

Members covered by Social Security? Yes No

Net assets (thousands) $9,201,831 $37,471,267

Contributions: Employees 

 (thousands) Employers

$246,173

$1,095,546*

$909,577

$2,326,029*

Source: GAO analysis of most recent plan CAFRs.

*Includes state appropriations

Benefit reductions: In 2010, the state adopted several benefit changes 

for new members of state plans effective January 1, 2011, including

• raising the normal retirement age from 62 to 67, 

• reducing COLAs to the lesser of 3 percent or half of the annual 

change in the CPI and made them noncompounding, and

• capping salaries used for benefit calculations and for determining 

contributions at $106,800 (indexed to the lesser of 3 percent or 

half of the annual change in the CPI).

Funding changes: The state issued $3.5 billion of POBs in 2010 and 

$3.7 billion in 2011 to fund the state’s annual contributions to various 

pension systems. Previously, in 2009, the state required its pension 

systems to switch from a market value (no smoothing) to a 5-year 

smoothing method for calculating actuarial assets and contributions. 

Selected locally-sponsored plan 

Plan basics

Policemen’s Annuity and Benefit Fund 

of Chicago

As of December 31, 2010

Active members 12,737

Beneficiaries 12,380

Members covered by Social Security? No

Net assets (thousands) $3,439,669

Contributions: Employees

 (thousands) Employers

$108,402

$183,835

Source: GAO analysis of most recent financial report.

 

Benefit reductions: In 2010, the state also adopted similar benefit 

changes for local government employees, including the members of this 

local policemen’s pension plan—except the normal retirement age for 

policemen was raised from 50 to 55.

Funding changes: The state enacted legislation in 2010 requiring the 

plan to move to an actuarially based funding method in 2015. 

Overview of Illinois state 

and local retirement 

systems (FY 2009)

Number of plans: 457

• State plans: 6 

• Local plans: 451

Active members: 633,233

• State plans: 491,283

• Local plans: 141,950

Beneficiaries: 404,194

• State plans: 292,907

• Local plans: 111,287

Percentage of members covered 

by Social Security: 55 

Assets (thousands): $100,765,313

• State plans: $67,472,265

• Local plans: $33,293,048

Contributions (thousands)

• Employees: $2,497,390

• State government: $2,765,993

• Local government: $3,150,048

Source: GAO analysis of most recent Census

and Social Security data.

Note: Census categorizes plans as state or local based on 

their level of administration, not sponsorship. 

Profiles of Selected State and Local 

Government Pensions

Illinois and the City of Chicago
Page 41 GAO-12-322 State and Local Pensions

Appendix I

Selected state-sponsored plans

Plan basics

Missouri State 

Employees’ 

Retirement System

Missouri Department of 

Transportation and Highway 

Patrol Employees’ 

Retirement System

As of June 30, 2011

Active members 51,660 8,160

Beneficiaries 35,315 7,792

Members covered by Social Security? Yes Yes

Net assets (thousands) $7,866,917 $1,555,681

Contributions: Employees 

 (thousands) Employers

$660

$ 291,121

$45

$150,022

Source: GAO analysis of most recent plan CAFRs.

Benefit reductions: In 2010, the state adopted several benefit changes 

for new employees of both these plans, effective January 1, 2011, 

including 

• raising the normal retirement age from 62 to 67 for most 

employees and

• increasing the vesting period from 5 to 10 years. 

Member contributions: The state also adopted changes requiring new 

employees to contribute 4 percent of compensation (current members do 

not contribute). 

Funding changes: The board of the State Employees’ Retirement 

System temporarily adjusted its actuarial smoothing methods from fiscal 

year 2009 to 2011 to reduce the effects of market volatility.

Selected locally sponsored plan 

Plan basics

City of Springfield, Missouri Police Officers’ 

and Fire Fighters’ Retirement Fund

As of June 30, 2011

Active members 394

Beneficiaries 497

Members covered by Social Security? No

Net assets (thousands) $191,168

Contributions: Employees

 (thousands) Employers

$2,991

$7,859

Source: GAO analysis of most recent financial report.

 

Funding changes: In 2009, the city approved a 0.75-cent sales tax, all 

of which will go toward funding the city’s Police Officers' and Fire

Fighters' Retirement Fund System. The city subsequently closed this 

plan to new members on January 31, 2010, so police and firefighters 

hired after this date participate in the statewide Local Government 

Employees Retirement System, which is less expensive for the city. 

Overview of Missouri state 

and local retirement 

systems (2009)

Number of plans: 66

• State plans: 10

• Local plans: 56

Active members: 265,049

• State plans: 229,472

• Local plans: 35,577

Beneficiaries: 148,249

• State plans: 123,832

• Local plans: 24,417

Percentage of members covered 

by Social Security: 73 

Assets (thousands): $42,604,597

• State plans: $36,489,230

• Local plans: $6,115,367

Contributions (thousands)

• Employees: $780,248

• State government: $486,439

• Local government: $1,045,550

Source: GAO analysis of most recent Census

and Social Security data.

Note: Census categorizes plans as state or local based on 

their level of administration, not sponsorship. 

Profiles of Selected State and Local 

Government Pensions

Missouri and the City of Springfield
Page 42 GAO-12-322 State and Local Pensions

Appendix I

Selected state-sponsored plans

Plan basics

Pennsylvania State 

Employees’ Retirement 

System (SERS)

Pennsylvania Public 

School Employees’ 

Retirement System

(PSERS)

As of Dec 31, 2010

Active members 109,255 279,152

Beneficiaries 111,713 194,622

Members covered by Social Security? Most (varies by plan) Yes

Net assets (thousands) $25,886,102 $51,311,252

Contributions: Employees 

 (thousands) Employers

$349,049

$273,083

$1,042,707

$747,753

Source: GAO analysis of most recent plan CAFRs.

Benefit reductions: In 2010, the state adopted several changes for new 

employees of both these plans, effective January 1, 2011 for SERS and 

July 1, 2011 for PSERS, including

• lowering the benefit multiplier from 2.5 percent to 2 percent (with 

an option to maintain the 2.5 percent multiplier if the member 

contributes at a higher rate), 

• increasing the vesting period from 5 to 10 years, and

• increasing the normal retirement age for general employees from 

60 to 65. 

Funding changes: In 2010, the state also capped increases in employer 

contribution rates to both systems at 3 percent for fiscal year 2011/2012, 

3.5 percent for fiscal year 2012/2013, and 4.5 percent thereafter. The 

state also adjusted the actuarial methods for both systems, re-amortizing 

State Employees’ Retirement System liabilities over 30 years and reamortizing Public School Employees’ Retirement System liabilities over 

24 years using a different actuarial method.

Selected locally-sponsored plan 

Plan basics

City of Philadelphia Municipal 

Pension Plan 

As of June 30, 2010

Active members 28,632*

Beneficiaries 35,694*

Members covered by Social Security? Yes (except police and fire)

Net assets (thousands) $3,501,602

Contributions: Employees

 (thousands) Employers

$51,570

$312,556

Source: GAO analysis of most recent financial report.

*As of July 1, 2009

Funding changes: The city partially deferred its pension payments in 

fiscal year 2010 and 2011 by $150 and $90 million respectively, but must 

pay these amounts in addition to its future annual required amounts by 

2014. The city also re-amortized its liabilities over 30 years.

Overview of Pennsylvania 

state and local retirement 

systems (FY 2009)

Number of plans: 1,425

• State plans: 3

• Local plans: 1422

Active members: 519,496

• State plans: 392,889

• Local plans: 126,607

Beneficiaries: 385,355

• State plans: 285,831

• Local plans: 99,524

Percentage of members covered 

by Social Security: 93 

Assets (thousands): $86,418,676

• State plans: $68,671,589

• Local plans: $17,747,087

Contributions (thousands)

• Employees: $1,560,757

• State government: $731,634

• Local government: $1,292,358

Source: GAO analysis of most recent Census

and Social Security data.

Note: Census categorizes plans as state or local based on 

their level of administration, not sponsorship. 

Profiles of Selected State and Local 

Government Pensions

Pennsylvania and the City of Philadelphia
Page 43 GAO-12-322 State and Local Pensions

Appendix I

Selected state-sponsored plans

Plan basics Utah Retirement Systems

As of December 31, 2010

Active members 104,467

Beneficiaries 46,399

Members covered by Social Security? Most (varies by plan)

Net assets (thousands) $19,756,106

Contributions: Employees 

 (thousands) Employers

$59,652

$682,600

Source: GAO analysis of most recent plan CAFRs.

Hybrid approach: In 2010, the state adopted a new retirement plan for 

all government employees (except judges) hired on or after July 1, 2011, providing the option of joining a defined contribution plan or a hybrid 

approach. The employer contribution rate is set at 10 percent of 

compensation for both options (12 percent for public safety employees).

For the defined contribution option, the employer contributes the full 10

percent to a 401(k), in addition to any voluntary employee contributions.

For the hybrid approach, members receive a defined benefit based on 

1.5 percent of highest average salary multiplied by years of service. If the 

actuarial calculated contribution rate for the defined benefit component is 

less than 10 percent, the employer deposits the difference into a 401(k) 

plan. If the actuarial rate exceeds 10 percent, members are required to 

make any additional contributions to the defined benefit component. 

Funding changes: In 2009, the system’s board expanded the 

amortization period for unfunded liabilities from an open 20 year period to 

a closed 25 year period and adjusted the actuarial smoothing methods to 

reduce the effects of market volatility.

Selected locally-sponsored plan 

Plan basics

Public Safety Retirement System 

(Bountiful City)

As of December 31, 2010

Active members 36

Beneficiaries not available

Members covered by Social Security? Yes

Net assets (thousands) $14,998 

Contributions: Employees

 (thousands) Employers

$- 

$485

Source: GAO analysis of most recent financial report.

. 

Hybrid approach: The city contributes to several pension plans that are 

administered by the Utah Retirement Systems, including the Public 

Safety Retirement System. The changes adopted by the state’s system, 

described above, apply to local government employees and employers 

as well. Thus, new city employees hired on or after July 1, 2011, have 

the same option of joining a defined contribution or a hybrid approach 

plan, and the city’s required contributions to these plans are comparable. 

Overview of Utah state and

local retirement systems 

(FY 2009)

Number of plans: 7 

• State plans: 6 

• Local plans: 1

Active members: 108,016

• State plans: 106,261

• Local plans: 1,755

Beneficiaries: 42,390

• State plans: 42,138

• Local plans: 252

Percentage of members covered 

by Social Security: 92 

Assets (thousands): $17,641,058

• State plans: $17,568,156

• Local plans: $72,902

Contributions (thousands)

• Employees: $36,471

• State government: $641,690

• Local government: $7,680

Source: GAO analysis of most recent Census

and Social Security data.

Note: Census categorizes plans as state or local based on 

their level of administration, not sponsorship. 

Profiles of Selected State and Local 

Government Pensions

Utah and the City of Bountiful
Page 44 GAO-12-322 State and Local Pensions

Map of Missouri Map of Missouri

Selected state-sponsored plans

Plan basics Virginia Retirement System

As of June 30, 2011

Active members 339,740

Beneficiaries 156,165

Members covered by Social Security? Yes

Net assets (thousands) $53,151,088

Contributions: Employees 

 (thousands) Employers

$27,623

$1,520,403*

Source: GAO analysis of most recent plan CAFRs.

* Includes member contributions paid by employers

Benefit reductions: In 2010, the state adopted several changes for new 

employees hired on or after July 1, 2010, including

• increasing the period for calculating final average salary from 3 to 

5 years, 

• raising the normal retirement age for general employees from age 

65 to the normal Social Security retirement age (age 67 for 

people born since 1960), 

• increasing the age and service requirements needed to qualify for 

an unreduced retirement benefit, and

• raising early retirement eligibility from age 50 to age 60.

Member contributions: The state also adopted changes requiring new 

state employees hired on or after July 1, 2010 to contribute 5 percent of 

compensation (current members’ contributions are paid by employers). In 2011, the state passed additional changes that as of July 1, 2011 

require all state employees to pay the 5 percent member contribution, not 

just new plan members.

Selected locally-sponsored plan 

Plan basics

Employees’ Retirement System of the 

City of Norfolk

As of June 30 2010

Active members 3,950

Beneficiaries 3,271

Members covered by Social Security? Yes (except public safety)

Net assets (thousands) $779,404

Contributions: Employees

 (thousands) Employers

$- 

$35,515

Source: GAO analysis of most recent financial report.

 

Member contributions: In 2010, the city adopted changes requiring new 

city employees hired on or after October 5, 2010, to contribute 5 percent 

of compensation (current members do not contribute).

Overview of Virginia state 

and local retirement 

systems (FY 2009)

Number of plans: 18

• State plans: 1 

• Local plans: 17 

Active members: 408,196

• State plans: 346,929

• Local plans: 61,267

Beneficiaries: 176,737

• State plans: 141,746

• Local plans: 34,991

Percentage of members covered 

by Social Security: 94 

Assets (thousands): $50,599,215

• State plans: $41,975,141

• Local plans: $8,624,074

Contributions (thousands)

• Employees: $139,892

• State government: $574,911

• Local government: $1,813,973

Source: GAO analysis of most recent Census

and Social Security data.

Note: Census categorizes plans as state or local based on 

their level of administration, not sponsorship. 

Profiles of Selected State and Local 

Government Pensions

Virginia and the City of Norfolk 
Appendix II: Actuarial Methods and 

Assumptions for Measuring Funded Status for 

Public Sector Defined Benefit Plans

Page 45 GAO-12-322 State and Local Pensions

Assessments of a plan’s funded status are complicated by the fact that 

there are different ways to measure plan assets and plan liabilities for 

different purposes, and the methods used can vary from plan to plan.1

Plan assets could be valued at either market value or at a “smoothed” 

value; smoothed values are often used with the goal of producing a 

pattern of employer contributions to the plan that does not fluctuate as 

much as the financial markets. Plan liabilities can be measured under a 

variety of different “actuarial cost methods.” An actuarial cost method is a 

means of assigning the costs of projected future benefits to time periods 

in advance of those payments. It determines what portion of the cost of 

an active worker’s future benefits is included in the plan’s liability (also 

sometimes called the actuarial accrued liability or the accrued liability) at 

any point in time.2

 Plan liabilities also vary with the actuarial assumptions 

used.3 One assumption in particular, the discount rate, has been a matter 

of considerable controversy.

Over the past decade, there has been a growing controversy over how 

the value of a plan’s liabilities should be determined, and in particular, 

over what discount rate should be used. The discount rate determines 

 

1

Funded status is a comparison of plan assets to plan liabilities. One measure of funded 

status is the “funded ratio,” which is calculated by dividing plan assets by plan liabilities. 

Another measure of funded status is the difference between plan assets and plan 

liabilities, that is, the dollar amount of surplus or deficit. For example, if assets are greater 

than liabilities, the funded ratio is greater than 100 percent and the plan has a surplus 

(overfunding) equal to the excess of assets over liabilities; if liabilities are greater than 

assets, the funded ratio is less than 100 percent and the plan has a deficit (underfunding, 

or unfunded liability) equal to the excess of liabilities over assets. 

2

As examples, three such cost methods, as they would apply to common final-averagesalary benefit formulas, are 1. “unit credit”—The accrued liability is based on the worker’s 

service to date and current average salary—2. “projected unit credit”—The accrued 

liability is based on the worker’s service to date and projected average salary at 

retirement—3. “entry age normal”—The worker’s service and salary are both projected to 

retirement to estimate a projected benefit. The cost of this benefit is allocated over the 

worker’s entire service (both past and projected future) as a level percentage of his or her 

salary. The accrued liability is the value of these allocated costs accumulated up to the 

point of the worker’s service to date.

3

Actuarial assumptions are needed to project the amount, likelihood, and timing of future 

benefits and to determine their present value, and include both economic and 

demographic assumptions. Economic assumptions typically include those for inflation, 

future salary increases, and the discount rate. Demographic assumptions typically include 

those for the likelihood of termination of employment, age of retirement, form of benefit 

elected, and longevity.

Appendix II: Actuarial Methods and 

Assumptions for Measuring Funded Status 

for Public Sector Defined Benefit Plans

The Discount Rate 

Controversy 
Appendix II: Actuarial Methods and 

Assumptions for Measuring Funded Status for 

Public Sector Defined Benefit Plans

Page 46 GAO-12-322 State and Local Pensions

some measure of “current value” (or “present value”) for pension benefits 

that are not payable until various points in the future. The higher the 

assumed discount rate, the lower the present value; conversely, the lower 

the assumed discount rate, the higher the present value. Thus, for 

example, a pension liability based on a 4 percent discount rate will be 

higher than the same liability based on an 8 percent discount rate. 

Because pension obligations extend far into the future, the discount rate 

is applied over a long period of time. As a result, the effect of the discount 

rate on pension liability measures can be substantial.

The discount rate controversy is an argument over two basic approaches 

to setting a plan’s discount rate: (1) basing the discount rate on the 

expected long-term return on plan assets (which, in recent years, often 

would produce discount rates between 7 and 8 percent), or (2) basing the 

discount rate on relevant interest rates in the bond market (which, in 

recent years, often would produce discount rates around 4 percent). The 

controversy is over which of these two approaches is the appropriate one 

for measuring the present value of the obligations of public sector pension 

plans.4

(1) Basing the discount rate on the expected long-term return on 

plan assets. In this approach, the higher expected market returns on 

risky assets such as stocks is incorporated into the discount rate. As 

such, the discount rate varies with the characteristics of the plan’s asset 

allocation, so that adopting a riskier investment policy can increase the 

discount rate and thereby lower liabilities and contributions.

• Those advocating for this approach argue that this rate provides the 

best estimate of the likely cost to finance the plan’s pension 

obligation. They say that assuming a discount rate lower than a plan’s 

expected rate of return would lead to higher contributions and thus 

overcharge the current generation.

• Those critical of this approach contend that using the expected rate of 

return takes credit for anticipated returns on risky investments before 

 

4

For some, the appropriate choice of discount rate will depend on the purpose for which 

the resulting liability measure will be used. For example, some would argue that an 

expected return on plan assets is the appropriate discount rate for funding purposes, while 

a bond-like interest rate is the appropriate discount rate for accounting purposes. Others 

might argue for one or the other for both purposes.
Appendix II: Actuarial Methods and 

Assumptions for Measuring Funded Status for 

Public Sector Defined Benefit Plans

Page 47 GAO-12-322 State and Local Pensions

such returns actually occur, and passes on the associated risk to

future generations. As such, using expected rates of return could 

understate the cost of pension benefits and potentially lead to 

excessive benefit promises. In addition, it may create an incentive to 

adopt riskier investment policies.

(2) Basing the discount rate on relevant interest rates in the bond 

market. In this approach, pension promises are viewed as “bond-like,” 

and so are valued similarly to how the financial markets value fixed 

income instruments of similar duration and credit quality.

• Those advocating for this approach contend that the value of a plan’s 

liability should be based on the characteristics of that liability, and not 

on the characteristics of any assets put aside to finance the liability. 

They say that while financial markets are volatile and not necessarily 

always rational, there is no better, objective way to measure the value 

of a pension promise than how the market currently values an 

obligation with similar characteristics

• Those critical of this approach hold that a “market” measure of plan 

promises is not relevant and thus should not be used in an ongoing 

pension plan. They contend that this approach would severely 

overstate pension costs and could lead to distorted funding, 

investment, and benefits policies.

Both the Governmental Accounting Standards Board (GASB) and the 

Actuarial Standards Board (ASB) have issued exposure drafts proposing 

comprehensive revisions to their standards regarding measuring and 

reporting pension obligations. 5

 

5

GASB exposure draft of revisions to Statement 27 issued June 2011; ASB exposure 

drafts of revisions to ASOP 4 and to ASOP 27 issued January 2012.

Under current GASB accounting 

standards, the discount rate must be the expected return on plan assets. 

The GASB proposals, if enacted, would set the overall discount rate equal 

to a composite of (1) the expected return on plan assets to the extent that 

the plan is funded or projected to be funded, and (2) a high-quality 

municipal bond rate to the extent that some plan benefits are not 

expected to be funded in advance. In practice, this blended discount rate 

is expected to be close to the current basis—that is, the expected return 

on plan assets—for most plans. The GASB proposals would also require 

Changes Currently 

Being Proposed
Appendix II: Actuarial Methods and 

Assumptions for Measuring Funded Status for 

Public Sector Defined Benefit Plans

Page 48 GAO-12-322 State and Local Pensions

the use of a single, uniform actuarial cost method; 6

Among other things, the ASB proposals, if enacted, would add additional 

disclosure requirements regarding funded status, including a requirement 

that whenever a funded status is disclosed using a smoothed value of 

assets, the corresponding statistic based on the market value of assets 

would also have to be disclosed; they would also require new disclosures 

regarding the type of liability measure used and the rationale for and 

reasonableness of the underlying actuarial assumptions. In addition, they 

would clarify that either approach to the discount rate is acceptable, with 

appropriate disclosure.

and they would use 

the current market value of plan assets, rather than a smoothed value, in 

determining a plan’s deficit or surplus, which would be reported on the 

government entity’s balance sheet.

 

6

The uniform actuarial cost method would be the “entry age normal” method, which is the 

method already used by most public sector plans. See prior footnote for a further 

description of actuarial cost methods.
Appendix III: GAO Contacts and Staff 

Acknowledgments

Page 49 GAO-12-322 State and Local Pensions

Barbara D. Bovbjerg, (202) 512-7215 or bovbjergb@gao.gov, or Stanley 

J. Czerwinski, (202) 512-6806 or czerwinskis@gao.gov. 

In addition to the contacts named above, Margie K. Shields, Assistant 

Director; Thomas James, Assistant Director; William Colvin, Analyst-inCharge; Robert Yetvin; and Andrea Yohe made significant contributions 

to this report. Susan Bernstein; James Bennett; Kathy Leslie; Frank 

Todisco; Walter Vance; Roger Thomas; and Sheila McCoy also made 

important contributions.

Appendix III: GAO Contacts and Staff 

Acknowledgments 

GAO Contact

Staff 

Acknowledgments 

(131013)
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