State and Local Government Retiree Benefits: Current Status of Benefit Structures, Protections, and Fiscal Outlook for Funding Future Costs
Published: 2007-09-24T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: State and local retiree benefits are not subject, for the most part, to federal laws governing private sector retiree benefits. Nevertheless, there is a federal interest in ensuring that all Americans have a secure retirement, as reflected in the special tax treatment provided for both private and public pension funds. In 2004, new government accounting standards were issued, calling for the reporting of liabilities for future retiree health costs. As these standards are implemented and the extent of the related liabilities become known, questions have been raised about whether the public sector can continue to provide the current level of benefits to its retirees. GAO was asked to provide an overview of state and local government retiree benefits, including the following: (1) the types of benefits provided and how they are structured, (2) how retiree benefits are protected and managed, and (3) the fiscal outlook for retiree benefits and what governments are doing to ensure they can meet their future commitments. For this overview, GAO obtained data from various organizations, used our model that simulates the fiscal outlook for the state and local sector, and conducted site visits to three states that illustrate a range of benefit structures, protections, and fiscal outlooks. Cognizant agency officials provided technical comments which were incorporated as appropriate.
section_title: What GAO Found
paragraphs: The systems for providing retiree benefits to state and local workers--who account for about 12 percent of the nation's workforce--are composed of two main components: pensions and retiree health care. These two components are often structured quite differently. Importantly, state and local governments generally have established protections and routinely set aside monies to fund their retirees' future pension costs, but this typically has not been the practice for retiree health benefits. A model GAO developed to simulate the fiscal outlook for state and local governments indicates that, for the sector as a whole, (1) estimated future pension costs (currently about 9 percent of employee pay) would require an increase in annual government contribution rates of less than a half percent, and (2) estimated future retiree health care costs (currently about 2 percent of employee pay) would more than double by the year 2050 if they continue to be funded on a pay-as-you-go basis. Because the estimates are very sensitive to the assumed rates of return and projected rates of health care inflation, the model also indicates that if rates were to fall below historical averages, the funding requirements necessary to meet future pension and health care costs could become much higher. Nevertheless, state and local governments generally have strategies to manage future pension costs. In contrast, many are just beginning to respond to the newly issued standards calling for the reporting of retiree health liabilities, and they generally have not yet developed strategies to manage escalating retiree health care costs. Across the state and local government sector, the ability to maintain current levels of retiree benefits will depend, in large part, on the nature and extent of the fiscal challenges that lie ahead--challenges driven primarily by the growth in health-related costs for Medicaid, and for active employees as well as retirees. In future debates on retiree benefits, policy makers, voters, and beneficiaries will need to decide how to control costs, the appropriate level of benefits, and who should pay the cost--especially for health care.

section_title: Letter
paragraphs: Over the past half-century, the number of state and local government  workers has grown significantly. In 2006, this sector accounted for about  12 percent of the nation’s workforce. Since 1996, accounting standards  calling for state and local governments to report their liabilities for future  pension costs have been in place, but standards calling for similar  treatment of the future costs of retiree health benefits have only recently  been issued. It is unclear, as yet, what actions state and local governments  may take once the future costs of these benefits are known. However,  future decisions about the appropriate levels of benefits for retirees will  likely occur in a broader context of persistent fiscal challenges that state  and local governments will face in the next decade. Hence, concerns have  been raised about the public sector’s capacity to meet the rising cost of  providing its retirees with promised pension and other postemployment  benefits, such as retiree health care.
State and local retiree benefits are not subject, for the most part, to federal  laws governing private sector retiree benefits. Nevertheless, there is a  federal interest in ensuring that all Americans have a secure retirement, an  interest that is reflected in preferential tax treatment for contributions and  investment earnings associated with qualified pension plans in both the  public and the private sectors. To better understand these benefits and the  future challenge state and local governments may face, you requested that  we provide an overview of state and local government pension plans and  retiree health benefit programs. Specifically, we examined  (1) the types of state and local retiree benefits provided and how they are  (2) how state and local retiree benefits are protected and managed, and  (3) the fiscal outlook for state and local retiree benefits and what  governments are doing to ensure they can meet their future  commitments.
For nationwide information about state and local retiree benefits, we  spoke with experts, advocacy groups, and union officials from various  national organizations and associations (see app. I). To profile the types of  governance and benefits provided, we obtained data from these  organizations, from various federal agencies, and from various  nongovernmental entities that analyze government data and conduct  surveys on these topics. (See the selected bibliography at the end of this  report for brief descriptions of each of these studies.) Much of the  available data are self-reported, but we conducted data reliability  assessments and determined that the data are sufficiently reliable for our  purposes. We also used our model that simulates the fiscal outlook for the  state and local government sector to develop projections for funding state  and local government retiree benefits in aggregate nationwide (see app.  II). In addition, we conducted site visits and gathered detailed information  about the benefits provided and the future fiscal implications in three  states (California, Michigan, and Oregon) and two local governments (San  Francisco and Detroit). We selected these sites to illustrate various types  of plan structures, legal protections, and levels of employer funding  commitments. For example, in California, the primary pension plan for  most state and local government employees is a defined benefit plan, with  protections in the state constitution, and with a funded ratio of 87.3  percent in 2005. In Michigan, the primary pension plan for general state  employees hired on or after March 31, 1997, is a defined contribution plan,  which is covered by the same state constitutional provision applicable to  the previous defined benefit plan; the previous plan, now closed to new  members, had a funded ratio of 79.8 percent in 2005. In Oregon, the  primary pension plan for most state and local government employees  includes both a defined benefit and a defined contribution component,  with no explicit protections in the state constitution; the defined benefit  component’s funded ratio was 104.2 percent in 2005. (See app. III for an  overview of retiree benefit plans in our site visit locations.) Finally, to  illustrate a wider range of retiree benefit system characteristics, in some  instances, we complemented information from our site visit locations with  information gathered about retiree benefits provided in other state and  local jurisdictions. We conducted our work from November 2006 to August  2007 in accordance with generally accepted government auditing  standards.
subsections: section_title: Background
paragraphs: The state and local government sector is likely to face persistent fiscal  challenges within the next decade. In July 2007, we issued a report based  on simulations for the state and local government sector that indicated  that in the absence of policy changes, large and growing fiscal challenges  will likely emerge within a decade. Our report found that, as is true for the  federal sector, the growth in health-related costs is a primary driver of  these fiscal challenges (see fig. 1). Two types of health-related costs are of  particular concern at the state and local level: (1) Medicaid expenditures,  and (2) the cost of health insurance for state and local government  employees, retirees, and their beneficiaries.
Retirement benefits consist primarily of two components: pensions and  retiree health benefits. According to Census data, in fiscal year 2004-2005,  state and local governments provided retirement benefits to nearly 7  million retirees and their families. In addition to supporting a secure  retirement for state and local government employees and their families,  such benefits constitute an important component of the total  compensation package state and local governments offer to attract and  retain the skilled workers needed to protect lives and health, and to  promote the general welfare. These workers include highway patrol  officers, local police, firefighters, school teachers, and judges, as well as  general state and local government employees who staff the broad array of  state and local agencies.
Pension plans can generally be characterized as either defined benefit or  defined contribution plans. In a defined benefit plan, the amount of the  benefit payment is determined by a formula typically based on the retiree’s  years of service and final average salary, and is most often provided as a  lifetime annuity. In defined benefit plans for state and local government  retirees, postretirement cost-of-living adjustments (COLA) are frequently  provided. But benefit payments are generally reduced for early retirement,  and in some cases, payments may be offset for receipt of Social Security.  State and local government employees are generally required to contribute  a percentage of their salaries to their defined benefit plans, unlike private  sector employees, who generally make no contribution when they  participate in defined benefit plans. According to a 50-state survey  conducted by Workplace Economics, Inc., 43 of 48 states with defined  benefit plans reported that general state employees were required to make  contributions ranging from 1.25 to 10.5 percent of their salaries.  Nevertheless, these contributions have no influence on the amount of  benefits paid because benefits are based solely on the formula.
In a defined contribution plan, 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. The employee assumes the investment risk: The account  balance at the time of retirement is the total amount of funds available,  and unlike with defined benefit plans, there are generally no COLAs. Until  depleted, however, a defined contribution account balance may continue  to earn investment returns after retirement, and a retiree could use the  balance to purchase an inflation-protected annuity. Also, defined  contribution plans are more portable than defined benefit plans, as  employees own their accounts individually and can generally take their  balances with them when they leave government employment. There are  no reductions based on early retirement or for participation in Social  Security.
Accounting standards governing public sector pensions were established  by the Governmental Accounting Standards Board (GASB) in 1994.  Comprehensive accounting and financial reporting standards governing  other postemployment benefits (OPEB) in the public sector, such as  health care, were issued in 2004 (superseding the interim standards issued  previously). Implementation of the new OPEB standards is currently being  phased in (see app. IV). The purpose of these standards is to prescribe  accounting and financial reporting requirements that apply broadly to  state and local government employers’ benefit plans. Reporting by  employers and plan administrators helps keep the municipal bond market,  taxpayers, elected public officials, plan members, and other interested  parties informed about employers’ OPEB costs and obligations, and the  operation and funded status of the plans. As with the Financial Accounting  Standards Board (FASB) in the private sector, it is not the GASB’s function  to enforce compliance with the standards it promulgates. Rather, the  GASB functions as an independent standard setter, and its statements and  interpretations constitute the highest source of generally accepted  accounting principles (GAAP) for state and local governments, as  specified in the Code of Professional Conduct of the American Institute of  Certified Public Accountants.  State and local governmental entities issue  annual financial reports prepared in conformity with GAAP for a variety of  reasons—such as to comply with general or specific state laws requiring  GAAP financial reporting, or to protect the highest possible credit rating  on the government’s bonds in order to reduce the government’s cost of  borrowing. Compliance with GASB standards is necessary in order to  obtain an independent auditor’s report that the financial statements are  fairly presented in conformity with GAAP, and a failure to do so would  result in a modification of the auditor’s report if the effects were material.
Although the Employee Retirement Income Security Act of 1974 (ERISA)  imposes participation, vesting, and other requirements directly upon  employee pension plans, governmental plans such as those provided by  state and local governments to their employees are excepted from these  requirements. In addition, ERISA established an insurance program for  defined benefit plans under which promised benefits are paid (up to a  statutorily set amount), if an employer cannot pay them—but this too does  not apply to governmental plans. However, for participants in  governmental pension plans to receive preferential tax treatment (that is,  for plan contributions and investment earnings to be tax-deferred), plans  must be deemed qualified by the Internal Revenue Service.
section_title: State and Local Retiree Benefits Typically Include a Defined Benefit Plan, a Voluntary Savings Plan, and Partially Paid Health Coverage
paragraphs: State and local governments typically provide their employees with  retirement benefits that include a defined benefit plan, a supplemental  defined contribution plan for voluntary savings, and group health  coverage. However, the way each of these components is structured and  the level of benefits provided varies widely—both across states, and  within states based on such things as date of hire, employee occupation,  and local jurisdiction.
subsections: section_title: Defined Benefit Plans Still Provide the Core Benefits for Most Retirees
paragraphs: Most state and local government workers still are provided traditional  pension plans with defined benefits. In 1998, all states had defined benefit  plans as their primary pension plans for their general state workers except  for Michigan and Nebraska (and the District of Columbia), which had  defined contribution plans as their primary plans, and Indiana, which had  a combined plan with both defined benefit and defined contribution  components as its primary plan. Almost a decade later, we found that as  of 2007, only one additional state (Alaska) had adopted a defined  contribution plan as its primary plan; one additional state (Oregon) had  adopted a combined plan, and Nebraska had replaced its defined  contribution plan with a cash balance defined benefit plan. (See fig. 2.)  Although still providing defined benefit plans as their primary plans for  general state employees, some states also offer defined contribution plans  (or combined plans) as optional alternatives to their primary plans. These  states include Colorado, Florida, Montana, Ohio, South Carolina, and  Washington.
In the states that have adopted defined contribution plans as their primary  plans, most employees continue to participate in defined benefit plans  because employees are allowed to continue their participation in their  previous plans (which is rare in the private sector). Thus, in contrast to  the private sector, which has moved increasingly away from defined  benefit plans over the past several decades, the overwhelming majority of  states continue to provide defined benefit plans for their general state  employees.
Most states have multiple pension plans providing benefits to different  groups of state and local government workers based on occupation (such  as police officer or teacher) and/or local jurisdiction. According to the  most recent Census data available, in fiscal year 2004-2005, there were a  total of 2,656 state and local government pension plans. We found that  defined benefit plans were still prevalent for most of these other state and  local employees as well. For example, a nationwide study conducted by  the National Education Association in 2006 found that of 99 large pension  plans serving teachers and other school employees, 79 were defined  benefit plans, 3 were defined contribution plans, and the remainder  offered a range of alternative, optional, or combined plan designs with  both defined benefit and defined contribution features.
section_title: Supplementary Savings Plans Are Largely Voluntary, with No Employer Match
paragraphs: In addition to primary pension plans (whether defined benefit or defined  contribution), data we gathered from various national organizations show  that each of the 50 states has also established a defined contribution plan  as a supplementary, voluntary option for tax-deferred retirement savings  for their general state employees, and such plans appear to be common  among other employee groups as well. These supplementary defined  contribution plans are typically voluntary deferred compensation plans  under section 457(b) of the federal tax code. (See table 1.)
While these defined contribution plans are fairly universally available,  state and local worker participation in the plans has been modest. In a  2006 nationwide survey conducted by the National Association of  Government Defined Contribution Administrators, the average  participation rate for all defined contribution plans was 21.6 percent.
One reason cited for low participation rates in these supplementary plans  is that, unlike in the private sector, it has been relatively rare for  employers to match workers’ contributions to these plans, but the number  of states offering a match has been increasing. According to a state  employee benefit survey of all 50 states conducted by Workplace  Economics, Inc., in 2006, 12 states match the employee’s contribution up  to a specified percent or dollar amount. Among our site visit states, none  made contributions to the supplementary savings plans for their general  state employees, and employee participation rates generally ranged  between 20 to 50 percent. In San Francisco, however, despite the lack of  an employer match, 75 percent of employees had established 457(b)  accounts. The executive director of the city’s retirement system attributed  this success to several factors, including (1) that the plan had been in  place for over 25 years, (2) that the plan offers good investment options  for employees to choose from, and (3) that plan administrators have a  strong outreach program. In the private sector, a growing number of  employers are attempting to increase participation rates and retirement  savings in defined contribution plans by automatically enrolling workers  and offering new types of investment funds.
section_title: Group Health Coverage Is Widely Available with Varying Levels of Employer Support
paragraphs: State and local governments typically provide their active employees with  health coverage, and they often pay the bulk of their premiums.  According to the Workplace Economics, Inc., 2006 survey, on average,  state employers paid over 90 percent of the cost for single employee  coverage, and over 80 percent of the cost of family coverage, for active  workers. Once workers retire, access to group coverage generally  continues, but the extent of the employer contribution often declines, and  different benefits are often provided depending on whether or not the  retiree is eligible for Medicare.
For virtually all state and local retirees age 65 or older, Medicare provides  the primary coverage. Most state and large local government employers  offer supplemental group health coverage, but do not always contribute to  the cost of the premiums. According to the Workforce Economics, Inc.,  2006 survey, all states but one provide access to such supplemental  coverage. Only Nebraska provides no access to group coverage for retirees  age 65 and over. In 12 states, retirees are provided access to coverage  through a state health care program, but the state provides no support for  the coverage. At the other end of the spectrum, in 16 states, employers  pay the entire cost for at least one coverage plan under some  circumstances. Of those states contributing to the premium costs, the  maximum employer payments for employee-only coverage ranged from  $40 per month (in Tennessee) to $850 per month (in Alaska).
For state and local retirees who are under age 65 (that is, not yet  Medicare-eligible), most state and large local employers provide the  primary health care coverage. According to the Workplace Economics,  Inc., 2006 survey, all states provide access to group health coverage for  pre-Medicare retirees, but in 14 states, the plan participants pay the entire  cost of the coverage (see fig. 3). In 14 other states, employers pay the  entire cost for at least one coverage plan in some circumstances. Of those  states providing an employer contribution, the maximum payments for  retiree-only coverage ranged from $105 per month (in Oklahoma) to $850  per month (in Alaska).
In most cases, states are continuing to provide retirees with prescription  drug coverage following the rollout of the Medicare prescription drug  program beginning in January 2006. In May 2006, the Segal Company, in  cooperation with the Public Sector HealthCare Roundtable, conducted a  survey of 109 state and local entities concerning retiree health care, and  found that most of the public entities surveyed continued to provide  prescription drug coverage to their retirees, and that only one entity  planned to eliminate drug coverage entirely.
Nationwide survey data indicate that while the vast majority of state and  local government active workers participate in employer-sponsored health  benefit plans, participation rates among retirees in these employer- sponsored health benefit programs are relatively low. According to data  from the Department of Health and Human Services, in 2004, about 42  percent of state and local retirees participated in employer-sponsored  health insurance programs. Among our site visit locations, we found that  participation rates varied widely based on level of employer cost sharing.  For example, in California, where the state may pay up to the full premium  in some cases (depending on the retiree's date of hire, years of service,  and choice of coverage plans); and in Michigan, where the state pays as  much as 95 percent of the retirees’ premium for those under the defined  benefit plan, we estimated participation rates to be approximately 70  percent and 90 percent of all state retirees, respectively. In contrast, in  Oregon, where the state pays nothing toward retirees’ premiums for  coverage under the pre-Medicare-eligible health care program  administered by the Public Employees Benefit Board, it has been  estimated that the participation rate among eligible retirees is about 30  percent.
section_title: The Cost of Other Benefits, when Provided, Is Primarily Paid by Retirees
paragraphs: Beyond basic health care, other postemployment benefits (OPEB) that are  sometimes offered to state and local government retirees include stand- alone supplemental dental or vision benefits, long-term care, or life  insurance. When such benefits are made available, state and local  government entities typically provide access to group rates, but the cost of  the benefits is often paid primarily, if not entirely, by retirees.
For example, among our site visit locations, postemployment benefits  provided to retirees in addition to health care include the following:    State employees in California generally have access to group term life  insurance with a lump-sum benefit of $5,000, paid by the state. Retirees  also are provided access to group dental benefits, which may be  partially funded by the state in some cases, and a retiree vision  program with premiums fully paid by retirees. Long-term care  insurance is also available to all public employees in the state (active or  retired), as well as their family members, generally as a fully member- paid program with no state contribution.  In Michigan, dental and vision (as well as health) coverage is provided  to general state employees at retirement. For those under the defined  contribution plan (that is, hired on or after March 31, 1997), payments  range from none for those with less than 10 years of service, to 30  percent of the premium cost for those with 10 years of service, plus 3  percent per year additional up to a maximum of 90 percent of the  premium cost for those who have 30 or more years of service. The state  also negotiated a group plan for long-term care insurance for active and  retired workers, and their family members, but it is administered  completely through a third party with no state support.
Oregon’s other postemployment benefits for state retirees include  group coverage for dental and vision benefits, but not life insurance.  Long-term care insurance is also available, but only for some retirees.  No employer contribution is provided for any of these benefits.
section_title: State and Local Law Generally Provides Legal Protections for Pensions, but Less So for Other Retiree Benefits of Public Employees
paragraphs: How both pension plans and retiree health benefits are protected and  managed is typically spelled out in statutes or in local ordinances, but  these laws generally provide greater protections for pensions than for  retiree health benefits. Laws protecting pensions are often anchored by  provisions in state constitutions and local charters. Across the multiple  plans providing benefits, state and local law typically requires that  pensions be managed as trust funds and overseen by boards. In contrast,  state and local law provides much less protection for retiree health  benefits. Retiree health benefits are generally treated as an operating  expense for that year’s costs on a pay-as-you-go basis and managed  together with active employee benefits.
subsections: section_title: Laws Protecting Pensions Are Often Anchored in State Constitutions and Local Charters
paragraphs: State and local laws generally provide the most direct source of any  specific legal protections for the pensions of state and local workers.  Provisions in state constitutions often protect pensions from being  eliminated or diminished. In addition, constitutional provisions often  specify how pension funds are to be managed, such as by mandating  certain funding requirements and/or requiring that the funds be overseen  by boards of trustees. Moreover, we found that at the sites we visited,  locally administered plans were generally governed by local laws.  However, state employees, as well as the vast majority of local employees,  are covered by state-administered plans.
Protections for pensions in state constitutions are the strongest form of  legal protection states can provide because constitutions—which set out  the system of fundamental laws for the governance of each state— preempt state statutes and are difficult to change. Furthermore, changing a  state constitution usually requires broad public support. For example,  often a supermajority (such as three-fifths) of a state’s legislature may  need to first approve changes to its constitution. If a change passes the  legislature, voters typically must approve it before it becomes part of the  state’s constitution.
The majority of states have some form of constitutional protection for  their pensions. According to AARP data compiled in 2000, 31 states have a  total of 93 constitutional provisions explicitly protecting pensions. (The  other 19 states all have pension protections in their statutes or recognize  legal protections under common law.) These constitutional pension  provisions prescribe some combination of how pension trusts are to be  funded, protected, managed, or governed. (See table 2.)
In nine states, constitutional provisions take the form of a specific  guarantee of the right to a benefit. In two of the states we visited, the state  constitution provided protection for pension benefits. In California, for  example, the state constitution provides that public plan assets are trust  funds to be used only for providing pension benefits to plan participants.  In Michigan, the state constitution provides that public pension benefits  are contractual obligations that cannot be diminished or impaired and  must be funded annually.
The basic features of pension plans—such as eligibility, contributions, and  types of benefits—are often spelled out in state or local statute. State- administered plans are generally governed by state laws. For example, in  California, the formulas used to calculate pension benefit levels for  employees participating in the California Public Employees’ Retirement  System (CalPERS) are provided in state law. Similarly, in Oregon,  pension benefit formulas for state and local employees participating in the  Oregon Public Employees Retirement System (OPERS) plans are provided  in state statute. In addition, we found that at the sites we visited locally  administered plans were generally governed by local laws. For example, in  San Francisco, contribution rates for employees participating in the San  Francisco City and County Employees’ Retirement System are spelled out  in the city charter.
Legal protections usually apply to benefits for existing workers or benefits  that have already accrued; thus, state and local governments generally can  change the benefits for new hires by creating a series of new tiers or plans  that apply to employees hired only after the date of the change. For  example, the Oregon legislature changed the pension benefit for  employees hired on or after January 1, 1996, and again for employees hired  on or after August 29, 2003, each time increasing the retirement age for the  new group of employees.
For some state and local workers whose benefit provisions are not laid out  in detail in state or local statutes, specific provisions are left to be  negotiated between employers and unions. For example, in California,  according to state officials, various benefit formula options for local  employees are laid out in state statutes, but the specific provisions  adopted are generally determined through collective bargaining between  the more than 1,500 different local public employers and rank-and-file  bargaining units. In all three states we visited, unions also lobby the state  legislature on behalf of their members. For example, in Michigan,  according to officials from the Department of Management and Budget,  unions marshal support for or against a proposal by taking such actions as  initiating letter-writing campaigns to support or oppose legislative  measures.
subsections: section_title: Pensions Are Typically Managed as Trust Funds with Board Oversight
paragraphs: In accordance with state constitution and/or statute, the assets of state  and local government pension plans are typically managed as trusts and  overseen by boards of trustees to ensure that the assets are used for the  sole purpose of meeting retirement system obligations and that the plans  are in compliance with the federal tax code. Boards of trustees, of  varying size and composition, often serve the purpose of establishing the  overall policies for the operation and management of the pension plans,  which can include adopting actuarial assumptions, establishing  procedures for financial control and reporting, and setting investment  strategy. On the basis of our analysis of data from the National Education  Association, the National Association of State Retirement Administrators  (NASRA), and reports and publications from selected states, we found that  46 states had boards overseeing the administration of their pension plans  for general state employees. These boards ranged in size from 5 to 19  members, with various combinations of those elected by plan members,  those appointed by a state official, and those who serve automatically  based on their office in state government (known as ex officio members).  (See fig. 4.)
Different types of members bring different perspectives to bear, and can  help to balance competing demands on retirement system resources. For  example, board members who are elected by active and retired members  of the retirement system, or who are union members, generally help to  ensure that members’ benefits are protected. Board members who are  appointed sometimes are required to have some type of technical  knowledge, such as investment expertise. Finally, ex officio board  members generally represent the financial concerns of the state  government.
Some pension boards do not have each of these perspectives represented.  For example, boards governing the primary public employee pension plans  in all three states we visited had various compositions and responsibilities.  (See table 3.) At the local level, in Detroit, Michigan, a majority of the  board of Detroit’s General Retirement System is composed of members of  the system. According to officials from the General Retirement System,  this is thought to protect pension plan assets from being used for purposes  other than providing benefits to members of the retirement system.  Regarding responsibilities, the board administers the General Retirement  System and, as specified in local city ordinances, is responsible for the  system’s proper operation and investment strategy.
Pension boards of trustees typically serve as pension plan fiduciaries, and  as fiduciaries, they usually have significant independence in terms of how  they manage the funds. Boards make policy decisions within the  framework of the plan’s enabling statutes, which may include adopting  actuarial assumptions, establishing procedures for financial control and  reporting, and setting investment policy. In the course of managing  pension trusts, boards generally obtain the services of independent  advisors, actuaries, or investment professionals.
Also, some states’ pension plans have investment boards in addition to, or  instead of, general oversight boards. For example, three of the four states  without general oversight boards have investment boards responsible for  setting investment policy. While public employees may have a broad  mandate to serve all citizens, board members generally have a fiduciary  duty to act solely in the interests of plan participants and beneficiaries.  Likely at least partially because of this specific duty, one study of  approximately 250 pension plans at the state and local level found that  plans with boards overseeing them were associated with greater funding  than those without boards.
When state pension plans do not have a general oversight board, these  responsibilities tend to be handled directly by legislators and/or senior  executive officials. For example, in the state of Washington, the pension  plan for general state employees is overseen by the Pension Funding  Council—a six-member body whose membership, by statute, includes four  state legislators. The council adopts changes to economic assumptions  and contribution rates for state retirement systems by majority vote. In  Florida, the Florida Retirement System is not overseen by a separate  independent board; instead, the pension plan is the responsibility of the  State Board of Administration, composed of the governor, the chief  financial officer of the state, and the state attorney general. In New York,  the state comptroller, an elected official, serves as the sole trustee and  administrative head of the New York State and Local Employees  Retirement System.
section_title: Laws Provide Less Protection for Retiree Health Benefits
paragraphs: In contrast with pensions, there are less likely to be statutory protections  applicable to retiree health benefits. To the extent that any such legal  protections exist, they more frequently stem from the negotiated  agreements between unions and government employers. In addition, the  cost of annual retiree health benefits typically have been treated as an  operating expense and managed together with active employee benefits,  although the benefits offered retirees may differ from those offered active  employees. Despite the general absence of a fund to manage, retiree health  programs frequently still have boards that help to determine the terms of  the health plans to be offered.
subsections: section_title: Retiree Health Benefits Are Subject to Change
paragraphs: Unlike the law governing pensions, the law governing retiree health  benefits for state and local government workers generally does not include  the same type of explicit protections. To the extent retiree health benefits  are legally protected, it is generally because they have been collectively  bargained and are subject to current labor contracts.
In cases where reductions to retiree health benefits are challenged in  court, the ultimate outcome depends on the specific facts and  circumstances and the applicable state and/or local law in each  jurisdiction. In Segal’s 2006 survey of over 100 state and local plans, 62  percent of respondents said that statutory or regulatory obligations  affected their ability to change retiree health coverage; 25 percent said that  retiree health coverage was subject to collective bargaining; and 17  percent said that other factors affected their ability to change retiree  health coverage. In two recent cases, however, the courts have upheld  the state’s right to modify retiree health benefits (see sidebar).
In 2000, Michign increased the co-pyment  nd dedctile to e pid nder it helth  pln for public chool retiree, nd retiree  sued. The te supreme cort held tht  retiree helth enefit were not ccred  finncienefit within the mening of the  Michign Contittion nd tht the te  eablihing the pln did not crete   contrctual right to such enefit. Studier v.  Mich. Pub. Sch. Emples. Ret Bd., 472 Mich.  642 (2005)
Retiree health benefits generally have been treated by state and local  governments as an operating expense for that year’s costs on a pay-as-you- go basis. State and local governments typically do not set aside funds  while employees are working to pay their future retiree health benefits.  Moreover, retiree health benefits are mostly managed together with active  employee benefits, although the actual benefits offered to retirees and to  active employees may be different. In most cases, retiree health benefits  are administered under the state or local employee benefit system.
Despite the general absence of a fund to manage, the administrators of  retiree health benefits may still look to boards to help determine the  health coverage to be offered. For example, in California, the same  CalPERS board that oversees the pension fund also oversees a health care  program. With respect to this health care program, the CalPERS board is  responsible for selecting insurers through which participants can receive  coverage. The CalPERS board negotiates, for example, the specific  services covered, premiums, and participant co-payments. Although many  local governments participate in the CalPERS program, the City and  County of San Francisco has chosen to administer its own separate  program. The Health Service System (a city department) is responsible for  administering the benefits for both active and retired employees, with  oversight from the Health Service Board (a city board). The Health Service  Board is charged with establishing rules and regulations for the Health  Service System and for conducting an annual review of the costs for  medical and hospital care. In Oregon, the Public Employees Benefit Board,  a separate entity from OPERS, is responsible for managing the health  benefits of both active and pre-Medicare-eligible retired employees, with  authority to negotiate the terms of their coverage.
section_title: Strategies Exist to Manage Future Pension Costs, but Not to Meet Escalating Costs for Retiree Health Care
paragraphs: While state and local governments generally have strategies to manage  future pension costs, they have not yet developed strategies to fund future  health care costs for public sector retirees. We analyzed the state and local  sector’s fiscal outlook with respect to the sector’s ability to maintain  current retiree benefits—that is, the sector’s ability to fund its future  liabilities—from two perspectives and came to similar conclusions. First,  in our simulation of the fiscal outlook for the state and local sector, we  developed projections of the likely cost of pensions and retiree health  benefits that already have been and will continue to be earned by  employees. Our simulation shows that the additional pension  contributions that state and local governments will need to make in future  years to fully fund their pensions on an ongoing basis are only slightly  higher than the current contribution rate. Our simulation also shows that  health care costs for retirees will likely rise considerably as a component  of state and local budgets, if these costs continue to be funded on a pay-as- you-go basis. Second, we analyzed data on the funded status of 126 of the  nation’s largest public sector retirement systems and found that with some  notable exceptions, most are relatively well funded, but that long-term  strategies to fund future health care costs for retirees are generally  lacking.
subsections: section_title: Current Contribution Rates Are Generally on Track, but Could Still Fall Short of Future Pension Needs
paragraphs: Our simulation indicates that state and local governments, in aggregate,  will need to make contributions to pension systems at a somewhat higher  rate than in recent years in order to fully fund their pension obligations on  an ongoing basis. Assuming certain historical trends continue and that  there is a steady level of pension contributions in the future, contribution  rates would need to rise to 9.3 percent of salaries—less than a half percent  more than the 9.0 percent contribution rate in 2006.
Our model is based on a variety of assumptions regarding employee  contributions, future employment, retirement, wages, rates of return,  pension characteristics, and other factors. For example, our analyses  relate to defined benefit plans only. (For details on our assumptions and  our model, see app. II.) We assume that employee contribution rates to  these pension funds will remain the same, relative to wages, as in the past.  We also assume that in the future, the real rate of return on pension assets  will be about 5 percent, which is based on the real returns on various  investment instruments over the last 40 years.
Our findings regarding the required contribution to pension funds on an  ongoing basis were, however, extremely sensitive to assumptions about  the future rate of return on invested pension funds. Some economists and  financial analysts have expressed concern that returns in the future may  not be quite as high as those in the past. Future investment returns may  not match past returns because, for example, slower labor force growth  may lead to slower economic growth, which may, in turn, reduce  investment returns. Also, pension managers may choose to invest in less  risky, lower-return investments in the future. If future rates of return are  more or less in line with historic experience, then our simulation should  provide a reasonable estimate of the contribution rates that will be needed  in the future. But if future rates of return decline, then contribution rates  would need to be higher than 9.3 percent of salaries, as indicated by our  base case simulation results. (See table 4.) Moreover, the results for  individual state and local governments may vary substantially.
section_title: Retiree Health Care Costs Could More than Double as a Percentage of Salaries over the Next Several Decades
paragraphs: Our simulation indicates that projected costs for retiree health benefits,  while not as large a component of state and local government budgets as  pensions, will more than double as a percentage of salaries over the next  several decades, if these costs continue to be funded on a pay-as-you-go  basis. In 2006, these costs amounted to approximately 2.0 percent of  salaries, but according to our simulation, by 2050, they will grow to 5.0  percent of salaries—a 150 percent increase. The key reason for this  substantial increase is the more general rise in health care costs, which, if  left unconstrained, will continue to cause costs to rise as a percentage of  salaries.
As with the projections of necessary pension contributions, our estimates  of retiree health benefit costs are also dependent on certain assumptions,  and are particularly sensitive to assumptions about the growth in health  care costs. For example, on the basis of research and discussions with  experts, we assumed that health care costs would grow at a higher rate  than the growth in the nation’s gross domestic product (GDP). If health  care costs were to rise only at the same rate as GDP, then by 2050, our  projected costs would grow only from 2.0 percent to 2.9 percent of  salaries, instead of 5.0 percent. Also, because our model is based on data  that did not incorporate possible savings attributable to the Medicare Part  D drug subsidy that began in 2006, the estimates may slightly overstate  retiree health costs. However, if health care costs were to rise more  rapidly than they have over the past 35 years, then the cost of retiree  health benefits would exceed our projected costs of 5.0 percent of salaries.  (See table 5.)
section_title: State and Local Governments Generally Have Strategies to Manage Costs for Their Future Pension Commitments
paragraphs: State and local governments typically set aside funds to finance the cost of  future pension obligations and use a variety of strategies to keep the  funding status of their plans on track. Funding status is a measure that  captures a government’s ongoing effort at one point in time to prefund its  future pension liability, generally expressed as the ratio of assets to  liabilities (also referred to as the funded ratio). Assessing the funding  status of public sector pension plans provides a second perspective on the  fiscal outlook of state and local government efforts to fund future pension  benefits. According NASRA’s Public Fund Survey as of 2007, the most  recent reports from 126 of the largest state and local pension plans in the  country indicate that over three-fifths of the plans were at least 80 percent  funded—a level generally viewed as being acceptable to support future  pension costs. However, funding levels across the different plans ranged  from about 32 to 113 percent. (See fig. 5.) Those state and local  governments with plans that are funded below acceptable levels may face  tough choices in the future between the need to raise taxes, cut spending,  or reduce benefits in order to meet their obligations.
A primary way state and local governments keep the funding status of  their pension funds on track is to make their actuarially required  contributions. There are three sources of revenues for pension benefits:  investment earnings, employee contributions, and employer contributions.  Investment earnings provide the major source of funding (see fig. 6). The  amount that employees are required to contribute is generally fixed by  state statute as a percentage of salary, while state and local governments  determine the level of employer contributions based on their plans’  funding status—that is, the extent to which liabilities already accrued are  funded. Actuaries calculate the contribution amount needed to cover the  liability that accrues each year and to pay an installment on any unfunded  liability. If a plan sponsor (that is, a state or local government employer) is  making these actuarially required contributions, the plan can have a  funded ratio below 100 percent yet still be on track toward full actuarial  funding.
Governments use various strategies to help them make their actuarially  required pension fund contributions. One strategy that governments use to  lessen the volatility of fluctuations in their actuarially required  contribution is to average the value of plan assets over a number of years  (referred to as “smoothing”). For example between 1999 and 2005,  California’s contribution rate for one of CalPERS’ pension plans ranged  from 1.5 percent of salaries to 17 percent of salaries. In 2005, California  began using smoothing techniques, and the contribution rate over the last  2 years changed only slightly—from 15.9 percent of salaries in 2006 to an  estimated 15.7 percent in 2007.
Another strategy government sponsors use to control their pension fund  contribution rates is to implement new, less costly benefit levels for newly  hired employees. Plan sponsors create a new “tier,” with different benefits,  for all employees hired after the date the new tier goes into effect. For  example, New York has four tiers in its State and Local Retirement  System, based on an employee’s occupation and date of hire. General  employees in tier 1 (hired before July 1, 1973) can retire at age 55 after 20  years of service with no reduction for early retirement. However, general  employees in tier 3 (hired between July 26, 1973, and September 1, 1983)  must be age 62 with 5 years of service or age 55 with 30 years of service to  retire with no reduction in benefit.
In addition to creating new tiers within the same pension plan,  government sponsors can also lower costs by adopting entirely new plans  for future hires. For example, Alaska recently switched from its previous  defined benefit plans to defined contribution plans for all general public  employees and teachers hired on or after July 1, 2006. According to the  state’s 2006 comprehensive annual financial report, the new pension  system was adopted to help stabilize contribution rates for all public  employers within the state. Also, in 2003, Oregon adopted a new program  with both a defined benefit and a defined contribution component as its  primary plan for public employees. Under the new program, Oregon  continues to provide a defined benefit funded by employer contributions  (with a lower benefit formula for new employees), while the employees’  contributions are now placed in individual accounts with no state  matching (the defined contribution component). Oregon officials estimate  that its pension reforms save public employers over $400 million per year.
Yet another strategy plan sponsors use to manage their costs is to seek  higher contribution rates from its employees. For example, in 2005,  Louisiana enacted legislation to raise the employee contribution rate for  general state employees participating in the State Employees’ Retirement  System hired on or after July 1, 2006, from 7.5 to 8.0 percent.
Finally, another strategy that some plan sponsors have used as part of an  overall strategy for managing pension costs is to issue bonds to reduce  their unfunded actuarial liabilities. If the interest rate on the bond is less  than the rate of return earned on pension assets, sponsors can achieve  some savings. For example, in 2005, Detroit issued $1.44 billion in bonds  to pay down the unfunded accrued actuarial liabilities of its two  retirement systems. Similarly, Oregon recently issued pension obligation  bonds to help reduce its employer contribution rate for the Public  Employees Retirement System. According to officials from Oregon’s  Legislative Fiscal Office, by issuing the pension bonds, they were paying a  lower interest rate on the debt service for the bonds (about 5.75 percent)  than they were currently earning on the bond proceeds. OPERS officials  said that earnings on the bond proceeds have averaged over 15 percent  over the last 4 years. However, it should be noted that issuing bonds to  make the employer contribution increases the government’s overall  exposure to financial risks to the extent that the bond proceeds are  invested in equities or highly leveraged portfolios for returns to exceed the  borrowing costs. Also, if rates of return were to move lower than the bond  rates, state and local governments would no longer realize an advantage to  having issued the bonds, because the rate they could earn on the proceeds  may no longer cover the debt service costs.
subsections: section_title: Failure to Maintain Acceptable Funding Levels May Place Future Taxpayers and/or Beneficiaries at Risk
paragraphs: Public pension plan funding levels are sensitive to a variety of external  influences, such as the rate of return on the funds’ investments, the annual  stream of contributions to the fund, and changes to the levels of benefits  that ultimately affect future liabilities. Although strategies are being used  to keep the funding of most plans on track, we found some notable  exceptions where the failure to use such strategies caused the funding  status to drop significantly. Over time, state and local governments could  be faced with the need to raise taxes, cut spending, or reduce benefits in  order to meet their obligations.
As investment earnings are the major source of pension funding, timely  payment of contributions is key to maximizing the compound interest  earned. However, sometimes a combination of factors makes it difficult  for state and local governments to make their actuarially required  contribution, and funding levels can drop. For instance, the sharp and  prolonged decline in the stock market that occurred in the early 2000s  reduced the value of many plans’ assets and increased the amount many  states and local governments needed to contribute to remain on track  toward full funding. Furthermore, to the extent state and local  governments experience slower economic growth, revenues might not  keep up with expenditures, making it difficult for the governments to meet  their funding commitments for pensions. For example, from 2001 to 2007,  Michigan’s contribution rate for the State Employees’ Retirement System  (MSERS) dramatically increased—from 4.7 percent to 18.1 percent of  payroll. During this period of slow revenue growth, Michigan used money  transferred from a pension fund subaccount to supplement the amount it  contributed to MSERS to make its full actuarially required contribution.
Even so, from 2002 through 2005, MSERS’s funded ratio dropped steadily  from 98.7 percent to 79.8 percent.
In some cases, employers fell short of making their actuarially required  contributions at the same time that they adopted significant increases in  pension benefits for their employees, and did so for years. For example, a  New Jersey state treasury department official told us that in 1997, the state  viewed the status of its pension funds as “overfunded,” and began  substituting “excess” pension assets for their actuarially required  contributions. The state skipped payments to the retirement plans over a  7-year period, totaling $8 billion. While in this “overfunded” position, the  state also approved costly benefit enhancements and early retirement  packages. According to the official, as a result of these enhancements and  less than prudent funding arrangements, compounded by the downturn in  the market conditions beginning in 2001, the funded ratios of several New  Jersey pension plans fell below acceptable levels. For instance, since 1999,  the funded ratio of New Jersey’s Public Employees’ Retirement System  declined from 113.5 to 79.1 percent as of June 30, 2005. Overall, the state  now faces an $18.9 billion unfunded liability for all of its retirement plans  combined. Similarly, in San Diego, the city did not make its actuarially  required contribution to the San Diego City Retirement System by about  $80 million from 1999 through 2004. At the same time, the city increased  benefits to current employees, and in a litigation settlement, increased  benefits to current retirees. As of June 30, 2006, the actuarial valuation  report for the system stated that the funding status had dropped from 97.3  percent in 2000 to a low of 65.8 percent in 2004, with an unfunded liability  of $1.37 billion. However, as of 2006, the system had regained ground up to  79.9 percent, with an unfunded liability of about $1.0 billion.
section_title: Most State and Local Governments Have Yet to Develop Long-Term Strategies for Financing Future Health Care Costs for Retirees
paragraphs: Most state and local governments generally lack long-term strategies to  address future health care costs. In addition, many of the governments are  still in the process of responding to the new GASB statement calling for  valuations of the liability for the future cost of other postemployment  benefits (OPEB), including health care benefits for retirees, as the  standard is being implemented in phases. Officials for the governments we  visited said that once the valuations were completed, they would consider  options for addressing these costs, if needed.
Several funding vehicles are available under the federal tax code to help  facilitate state and local government efforts to accumulate funds to meet  their future health care liabilities. (See table 6.) As noted earlier, of the  state and local governments that contribute to retiree health benefits, most  treat the cost of the benefits as an operating expense and do not prefund  the future obligation. Of the states that provide an explicit contribution to  the premiums for retiree health coverage, it has been reported that 13  partially prefund their future health care costs. But these prefunding  efforts have been slow to get started. For example, in 1989, the  Connecticut Teacher’s Retirement System created a Health Insurance  Premium Account, using a 1 percent of salary contribution from active  teachers to fund health benefits for retirees. The fund was facing  insolvency by 1999. To address the shortfall, in 2004, Connecticut  increased active teachers’ contributions to the fund from 1 percent to 1.25  percent of salary. In Michigan, state budget officials said that they would  like to prefund retiree health care benefits for state employees, but other  state priorities have prevented them from doing so. However, a fund was  recently set up for local employees in Michigan. In 2004, the Municipal  Employees’ Retirement System of Michigan created a Retiree Health  Funding Vehicle to allow municipalities to contribute to a trust fund for  retiree health benefits. As of September 2007, system officials reported  that 55 employers were participating in the program, and that the fund had  over $95 million available for retiree health care costs. More recently, in  March 2007, CalPERS launched the California Employers’ Retiree Benefit  Trust Fund, an investment vehicle that allows public employers that  contract with CalPERS for employee health benefits to prefund their  future OPEB costs.
At the sites we visited, state and local government officials we spoke with  said that the rising cost of health care was one of the biggest fiscal  challenges confronting them in the near term. They said the drivers of  their health care costs mirror those of the nation as a whole: rapidly  escalating costs for prescription drugs, medical care, and hospital care.  Further, they noted that the health care industry’s practice of shifting costs  not paid by the Medicare and Medicaid programs to employers is causing  employers’ costs for health insurance premiums to rise even faster. In  addition to the costs associated with providing health care benefits for  their active and retired workers, states also must contend with rising costs  for their uninsured residents and federal changes to Medicaid. Officials  who administer health benefits for California state and local governments  noted that much of the cost increase for the health care market is due to  health care inflation and demographic factors that are outside of their  control. At the same time, with respect to health care, there are also  factors that are within their control to help manage these costs, such as  their program’s benefit design and eligibility criteria.
Aside from prefunding through establishment of a trust, several states  have taken steps to address escalating costs of retiree health benefits by  negotiating lower premium costs and/or reducing benefits. For example,  as in the private sector, some public employers have negotiated lower  premiums by increasing the deductibles, co-payments, and coinsurance  that employees must pay out of pocket. In addition, several states have  introduced requirements that employees must work a certain number of  years before becoming eligible for various levels of retiree health benefits.  California introduced such vesting requirements for partially paid retiree  health benefits for workers hired in 1985 and thereafter; and Michigan  introduced similar requirements in 1997. In 2006, North Carolina enacted  legislation requiring that employees hired after February 1, 2007, must  have 20 years of service to be eligible for retiree health benefits. Other  states have reduced the benefits provided and/or instituted health savings  accounts. Oregon has discontinued its retiree health care support for those  hired since 2003. Also, to reduce state costs, Utah recently discontinued its  policy of providing retirees a month of health insurance for every day of  unused sick leave (a policy initiated when health insurance costs were  substantially lower). Instead, Utah now deposits wage amounts equal to  unused sick leave into health savings accounts that retirees can use to  purchase their own health insurance.
State and local governments indicated that they may take a range of  actions in response to the new GASB standards. At the locations we  visited, all the officials we spoke with said that their governments were  planning to comply with the new standards and report their liability for  retiree health benefits. However, while various options were being  discussed, none of the officials we spoke with said that their governments  had developed plans to address their unfunded liabilities. In California, for  example, the governor had established a 12-member Public Employee  Post-Employment Benefits Commission to propose ways to address the  state's growing postemployment benefits and retiree health care  obligations, with a recommended plan due by January 1, 2008. According  to Oregon retirement system officials, their state had also formed a  workgroup to study options related to GASB 45. In Detroit, the city budget  director said that city officials would wait to find out if any practices  emerge that gain wide support before deciding their next steps. San  Francisco is also taking a wait-and-see approach with respect to devising a  strategy for dealing with the unfunded liability. A senior city official said  that the city wants to have several years’ experience estimating the  unfunded liability to feel confident that the estimates are valid before  negotiating any remedies with the unions. Otherwise, he noted, if the costs  end up being greater than anticipated, it could be difficult to reopen  negotiations with the unions and the city would then have to deal with the  greater costs on its own.
section_title: Concluding Observations
paragraphs: Across the state and local government sector, the ability to maintain  current levels of public sector retiree benefits will depend, in large part, on  the nature and extent of the fiscal challenges these governments face in  the years ahead. While public sector workers have thus far been relatively  shielded from many of the changes that have occurred in the private  sector, provisions that lend stability for public sector pensions and retiree  health benefits are subject to change. Pension benefits are often protected  by state constitutions and city charters, but these protections can be  amended if voters feel the need to rebalance priorities as fiscal pressures  increase. In fact, our recent work on state and local government fiscal  conditions indicated that persistent fiscal challenges will likely emerge  within the next decade. Retiree health benefits are generally easier to  change simply through the annual budget process.
As we heard from some state officials, the impetus for changing retiree  benefits often surfaces when the projected costs for these benefits starts  to grow faster than expected. When this occurs, governments may  eventually have little choice but to reduce future benefits or raise taxes.  One way state and local governments can address unexpected gaps in  funding is to prefund the promised benefits. Even though our simulation  suggests that the sector as a whole is generally on track with funding its  pension obligations, continued diligence will be necessary to ensure that  funding is adequate in the future. When state and local governments take  breaks from their regular contribution schedules, such as when  investment returns are high, they may be putting their ability to pay future  retiree benefits at risk. According to our simulation for state and local  governments, to ensure that they have the resources they need to meet  future costs, they will have to maintain (and as a sector, increase slightly)  their contributions to their pension funds. Moreover, our long-term  projections indicate that if future returns turn out lower than expected,  governments may need to ratchet up their contributions substantially.
The provision of retiree health benefits presents an entirely different  scenario. Given that our simulations show that over the next several  decades, the cost of providing health care benefits for public sector  retirees will more than double as a share of salaries, state and local  governments may find it difficult to maintain current benefits levels. It is  clear from our model and from discussions with budget officials that  health care inflation is driving these future costs. Budget officials with  whom we spoke said that they will face challenges financing future health  care benefits in general—including Medicaid benefits and health benefits  for active government employees, not just for their retirees. As state and  local governments begin to comply with GASB reporting standards,  information about the future costs of the retiree health benefits will  become more transparent. Policy makers, voters, and beneficiaries can use  this new information to begin a debate on ways to control escalating  health care costs, the appropriate level of future benefits to be provided to  public sector retirees, and who should pay for them.
section_title: Agency Comments
paragraphs: We provided officials from the Internal Revenue Service with a draft of  this report.  These officials provided us with informal technical comments  that we have incorporated in the report, where appropriate. In addition,  we provided GASB officials and officials from the states and cities we  visited with portions of the draft report that addressed aspects of the  pension funds and retiree health benefit programs in their jurisdictions.   They, too, provided us with comments that we incorporated in this report,  where appropriate. Finally, we also benefited from comments provided by  two external reviewers knowledgeable about the subject area.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to relevant  congressional committees, the Acting Commissioner of Internal Revenue,  and other interested parties. We will also make copies available to others   upon request. In addition, the report will be available at no charge on the  GAO web site at http://www.gao.gov. If you or your staff have any  questions concerning this report, please call me at (202) 512-7215. Key  contributors are listed in appendix V.
section_title: Appendix I: Organizations, Associations, and State and Local Agencies GAO Contacted
subsections: section_title: National Level
section_title: State and Local Level
subsections: section_title: California State
section_title: California Local
section_title: Michigan State
section_title: Michigan Local
section_title: Oregon State
section_title: Appendix II: Technical Background on Pension and Retiree Health Care Simulations
paragraphs: One of the primary costs of state and local governments is the salaries and  benefits of employees, and part of those costs are the pensions and other  postemployment benefits of retirees of state and local governments. This  appendix provides information on the development of simulations of  future pension and health care costs for retirees of state and local  governments. These analyses are part of a larger GAO effort that examines  the potential fiscal condition of the state and local sector for many years  into the future, and are an aggregate analysis of the entire state and local  sector—no individual governments are examined. This appendix provides  information on (1) the development of several key demographic and  economic factors such as future employment, retirement, and wages for  the state and local workforce that are necessary for the simulations of  future pension and retiree health care costs; (2) how we project the  necessary contribution rate to pension funds of state and local  governments; and (3) how we project the future yearly pay-as-you-go costs  of retiree health benefits.
subsections: section_title: Development of Factors for Employment, Retirement, Wages, and Benefits
paragraphs: Key underlying information for the pension and health care cost  simulations relates to future levels of employment, retirees, and wages. In  particular, to understand the postretirement promises that the sector has  and will continue to make, we need to project the number of employees  and retirees in each future year, as well as the dollar value of pension  benefits that will be earned and the extent to which those benefits will be  funded through employee contributions to pension funds. These analyses  relate to defined benefit plans only. We project the following key factors  for each year during the simulation time frame: (1) the number of state and  local government employees, (2) the state and local government real  wages, (3) the number of pension beneficiaries, (4) average real benefits  per beneficiary, and (5) yearly employee contributions to state and local  government pension plans.  1. Steps to Project Future Employment Levels   Future growth in the number of state and local government retirees— many of whom will be entitled to pension and health care benefits—is  largely driven by the size of the workforce in earlier years. To project the  level of employment in each future year, we assume that state and local  employment grows at the same rate as total population under the  intermediate assumptions of the Old-Age and Survivors Insurance and  Disability Insurance (OASDI) Trustees. The implication of these  assumptions is that the ratio of state and local employment to the total  population remains constant. The Trustees assume that population  growth gradually declines from 0.8 percent during the next decade to a  steady rate of 0.3 percent per year beginning in 2044. Accordingly, state  and local government employment displays the same pattern in our  projections. The relationship used to project total state and local  government employment (egslall) is shown in equation 1:  np is population in the indicated year  egslall is the number of state and local employees in the  indicated year  2. Steps to Project Future State and Local Government Real Wage   The pension benefits that employees become entitled to are a function of  the wages they earned during their working years. As described below, we  developed a rolling average real wage index for different cohorts of  workers to estimate the average real pension benefit of the recipient pool  in each future year.
First, we assume that the real employment cost index for the state and  local sector (jecistlcr) will grow at a rate equal to the difference between  the Congressional Budget Office (CBO) assumptions for the growth in the  employment cost index (ECI) for private sector wages and salaries and  inflation as measured by the consumer price index for all urban  consumers (CPIU), as published in the January 2007 CBO Budget and  Economic Outlook. These data are available through 2017. For later years,  we hold the growth rate constant at the rate that CBO assumes between  2016 and 2017.
CBO’s assumptions for growth in the ECI and the CPIU are 3.3 percent and  2.2 percent per year respectively, implying a real wage growth of 1.1  percent per year during the simulation time frame. Since the analysis is  scaled to the real wage bill over the simulation time frame, we calculate  that aggregate amount for each future year. As shown in equation 2,  aggregate real wages are assumed to grow at the combined rate of growth  in the real employment cost index (jecistlcr) and employment (egslall).  where:  jecistler is the real employment cost index in a given year  gsclwageallr is the real wage bill of the state and local sector  As noted previously, population growth slows from 0.8 percent in the  upcoming decade to a steady rate of 0.3 percent after 2044. Because  population growth drives employment in our projections, this slowdown  implies that aggregate real wage growth slows from 1.9 percent per year to  a steady long-run rate of 1.4 percent.  3. Steps to Project Growth in the Number of Pension Beneficiaries   While actuaries use detailed information and assumptions regarding the  age, earnings, service records, and mortality rates applicable to the entities  they evaluate, information in such detail is not available for the state and  local government sector as a whole. This lack of detailed data necessitated  the development of a method of projecting aggregate state and local  beneficiary growth that is much simpler than the methods that actuaries  employ.
The method we developed reflects the logic that each year’s growth in the  number of beneficiaries is linked to past growth in the number of  employees. Total state and local government employment from 1929  through 2005 was obtained from the National Income and Product  Accounts (NIPA) tables 6.4a, b, c, and d. The Census Bureau provided a  continuous series of data on the number of state and local pension  beneficiaries from 1992 through 2005 during which continuous  observations were available.
Cyclical swings in the employment series were removed using a Hodrick- Prescott filter. Then, both the employment and beneficiary series were  logged and first-differenced, transforming the data from levels to  proportionate changes. We developed a routine that searched across 45  years of lagged employment growth to select a set of weights for the years  in which past employment growth best explained a given year’s growth in  beneficiaries. The routine included the restrictions that the weights must  be non-negative and sum to 1. The method produced the relationship  shown in equation 3, where beneficiaries is equal to the state and local  pension benefit recipients, eglsall is state and local employees, and the  coefficients are weights, derived from the estimation, that reflect the  contribution of a particular past year’s employment change in explaining a  given year’s change in retirees. In particular, the estimated relationship  suggests that beneficiary growth in a given year is largely determined by  employment growth 34, 21, 22, and 23 years prior to the given period. This  pattern appears consistent with the categories of workers that the sector  employs. Many fire and police positions, for example, offer faster pension  accrual or early retirement due to the physical demands and risks of the  work, while many other state and local workers have longer careers. ) d.
560 d. ) ) log d. d. ) ) where:  beneficiaries is the number of retirees receiving pensions in the   indicated year.  4. Steps to Project Real Benefits per Beneficiary   While, in the long run, the average real benefit level should grow at the  same rate as real wages—that is, at 1.1 percent per year—in the first  decades of the projection the average real benefit will be affected by real  wage changes that occurred before the projection period. Accordingly, we  developed a relationship that reflects how the average real benefit level  will change over time according to changes in the number and average real  benefit level of three subsets of the retiree population: (1) new retirees  entering the beneficiary pool, (2) new decedents leaving the pool, and (3)  the majority of the previous year’s retirees who continue to receive  benefits during the given period. Each group’s real benefit is linked to the  real wage level in the average year of retirement for that group. Thus, to  determine the average real benefit overall in any future year, we need  weights and real wage indexes for the three groups that can be used to  develop a rolling average real wage of the recipient pool in each future  year.
Equation 3 above projects the percentage change in the total number of  beneficiaries between two successive years, but this difference is actually  composed of two elements: the percentage change in new retirees minus  the percentage change in decedents. Therefore, to determine the weight  for new retirees, we also need an estimate of the number of new decedents  in each year. In order to estimate a “death rate,” we utilize Social Security  Administration data on terminated benefits and total OASDI recipients,  which excludes disability recipients. Our estimate of the “death rate” for  the forecast period is assumed to be equal to the number of terminated  Social Security recipients divided by the total number of OASDI recipients  in 2003 (3.67 percent). This analysis then enables a derivation of weights  for each of the three groups as follows:    weight for new retirees: the number of beneficiaries this year, less the  number of beneficiaries last year who are still alive, divided by the  number of beneficiaries this year ( )    weight for continuing recipients is equal to last year’s beneficiaries  divided by this year’s beneficiaries ( )    weight for the deceased is the death rate (3.67 percent) multiplied by  last year’s beneficiaries divided by this year’s beneficiaries ( )
Mathematically the weights are calculated as follows: 0367 .
Next, we need to identify the real employment cost index that determines  the real benefit level for each of these three groups. We do so by  estimating the average retirement year applicable to each of the three  groups. First, we assume the average retirement age is 60. We developed  this estimate based on an analysis of the March Supplement to the Current  Population Survey (CPS) for 2005-2006, which indicated that the average  state and local government retiree had retired at 60 years of age. We also  analyzed detailed data on the age distribution of OASDI recipients  provided by the Office of the Actuary of the Social Security  Administration. These data showed that the average age for new  decedents is about 81 during the initial years of OASDI’s simulations, and  we thus used a 21-year lag—81 minus 60—to estimate the real wage  applicable to this group. For the newly retired group, we use the current  year’s employment cost index. For the remaining retirees—those already  retired and remaining in the group—we use information from CPS for 2005  that indicated that the average age of a retired state or local retiree was 68.  Therefore, we apply an 8-year lag to the real employment cost index to  determine real benefits of this group.
Using the weights shown in equation 4a and the appropriate periods’  values for the real employment cost index (jecistlcr), the rolling average  jecistlcr is constructed as follows:  where:  wjecistlcr is the rolling average employment cost index for retirees  in year t.
This equation approximates the average employment cost index at  retirement of the retiree pool in a given year. To do this we take the  employment cost index 8 years prior to the given year and weight this by  the portion of the total retirees in the given year who were already retired  last year. We add to this a factor to account for new retirees who have a  higher employment cost index because they just retired. Finally, because  some of the retirees from last year have deceased, the first factor  overstates the number of retirees, and therefore we subtract a factor for  those who have died, weighted by the cost index 21 years ago, when, on  average, this group entered retirement.
section_title: Projections of Necessary Contributions to Pension Funds for State and Local Government Sector
paragraphs: The purpose of the pension simulations is to estimate the level of  contribution that state and local governments would need to make each  year going forward to ensure that their pension systems are fully funded  on an ongoing basis. In the previous section we calculated a variety of  critical demographic and economic factors that are necessary for this  analysis. In the following section, we describe our basic formulation and  sensitivity analysis for employer contributions to pension funds.
subsections: section_title: Basic Formulation of Necessary Steady Level of Employer Contributions
paragraphs: The necessary contribution rate can now be derived according to a simple  concept: the present value of future pension benefits minus the sum of  2006 pension fund financial assets and the present value of employee  contributions, all divided by the present value of future wages. The  starting value of pension assets for state and local government pension  plans—approximately $2.979 trillion in 2006—is obtained from the Federal  Reserve Flow of Funds Accounts. Future wages are simulated within our  model. The logic of this estimation is that the benefits that are promised to  employees (including liabilities already made and promises that will be  made in the future) must be paid from three sources: existing pension  funds in 2006, contributions that employees will continue to make to those  funds in the future, and contributions that employers will make to those  funds in the future.
Our analysis estimates the steady level of employer contribution, relative  to wages, that would need to be made in every year between 2006 and  2050 to fully fund promised pension benefits. Although we are only  interested in developing necessary contribution rates over the simulation  time frame—that is, until 2050—we actually have to derive the  contribution rate for a longer time frame in order to find the steady state  level of necessary contributions. This longer time frame is required  because the estimated contribution rate increases as the projection  horizon increases and eventually converges in a steady state. If the  projection period is of insufficient length, the steady level of contribution  is not attained and the contribution rate necessary is understated. As  such, all of the flows in the calculation extend 400 years into the future.  We use a real rate of return on pension assets of 5.0 percent (rpenreal) to  discount future flows when deriving present values. Equation 6 shows  mathematically the estimate of the employer contribution rate. ) lr ) where:  rpenreal is the real rate of return on pension assets  Applying this analysis, we found that in aggregate, state and local  government contributions to pension funds would need to increase by less  than half a percent to fund, on an ongoing basis, the pension liabilities they  have and will continue to accrue. In particular, the 2006 pension  contributions for the sector amounted to 9 percent of wages, and our base  case estimate is that the level would need to be 9.3 percent each year to  fully fund pensions.
section_title: Sensitivity Analyses of Necessary Steady Level of Employer Contributions
paragraphs: We altered certain of our assumptions to examine the sensitivity of our  model results. We found that the model results are highly sensitive to our  assumptions regarding the expected real yield. For our primary  simulations, we based the expected real yield on actual returns on various  investment instruments over the last 40 years as well as the disposition of  the portfolio of assets held by the sector over the last 10 years. This  generated a real yield of 5 percent. But some pension experts have  expressed concern that returns on equities in the future may not be quite  as high as those in the past. In fact, some analysts believe that an analysis  of this type should consider only “riskless returns.” Under such an  approach we would assume that all pension funds are invested in very safe  financial instruments such as government bonds. We estimated the  necessary steady level of employer contributions holding all elements in  the model stable except the real expected yield. In particular, we analyzed  a 4 percent real yield and a 3 percent real yield—that latter of which is a  reasonable proxy for a riskless rate of return. We found that if returns  were only 4 percent, the necessary contribution rate would rise to 13.9  percent, and if we used a risk-free return of roughly 3 percent, the  necessary contribution rates would need to be much higher—nearly 18.6  percent of wages. On the other hand, if real returns were higher than our  base case level—perhaps 6 percent—the necessary contribution rate  would only be only 5.0 percent, much lower than their current  contribution rate.
section_title: Projections of Retiree Health Benefit Costs for State and Local Retirees
paragraphs: Most state and local government pay for retiree health benefits on a pay- as-you-go basis—that is, these benefits are generally not prefunded. We  made projections of the pay-as-you-go cost of retiree health benefits for  the sector, as a percentage of wages, in each year until 2050. To estimate  the costs of retiree health benefits in future years, we made many of the  same assumptions as for the pension analysis. In particular, we use the  same method to develop projections of employment in the sector, the  number of retirees, and the level of wages. An additional assumption for  the health care analysis is that in future years, the same percentage of  retirees of state and local governments will be enrolled in health insurance  through their previous employer as we observe were enrolled in 2004—the  most recent year for which data were available. To develop this measure,  we use data from two sources. The Census Bureau’s State and Local  Government Employee-Retirement System survey provided data on the  total number of state and local retirees, and the Health and Human  Services Department’s Medical Expenditure Panel Survey provided data  on state and local government retirees who are covered by prior employer- provided health insurance. On the basis of these data sources, we found  that the share of retirees with health insurance is 42 percent, and we hold  this constant through the simulations. From the latter data source we also  obtain the most recent year state and local government spending on health  care for retirees.
One of the most central assumptions we must make to estimate the pay-as- you-go health care costs for retirees in future years is the cost growth of  health insurance. The cost of health care has been growing faster than  gross domestic product (GDP) for many years. As such, we developed  assumptions about how much faster health care costs would grow, relative  to the economy, in future years. The extent to which the per person cost of  health care is expected to grow beyond GDP per capita is called the  “excess cost factor.” We developed these estimates based on our own  research and discussions with experts. In particular, we assume that the  excess cost factor averages 1.4 percentage points per year through 2035,  and then begins to decline, reaching 0.6 percentage points by 2050.
Using these assumptions, we develop a growth projection for the per  capita costs of health care for retirees each year through 2050. The  following equation shows that health care costs are assumed to grow with  GDP per capita plus this excess cost factor.  7) (retgslchlth / rethlth ) = (retgslchlth (-1) / rethlth (-1)) *  (hlthnheexcgr) * ((gdp / np) / (gdp (-1) / np (-1))) retgslchlth is the aggregate health care cost for the sector  rethlth is the number of retirees with health insurance  hlthnheexcgr is the excess cost factor for health insurance  We found that the projected costs for retiree health benefits, while not a  large component of state budgets, will more than double as a percentage  of wages over the next several decades. In 2006, these costs amounted to  approximately 2.0 percent of wages, and we project that by 2050, they will  grow to nearly 5.0 percent of wages—a 150 percent increase. As with the  projections of necessary pension contributions, our estimates of retiree  health benefit costs are highly sensitive to certain of our assumptions. In  particular, the assumptions regarding health care cost growth are critical.  For example, if health costs were to only rise at the rate of GDP per capita,  these costs would only grow, as a percentage of wages, from 2 percent  today to 2.9 percent by 2050. Conversely, if health costs were to grow by  twice the rate we assume in the base case, these costs, as a percentage of  wages, would constitute 8.4 percent by 2050.
section_title: Appendix III: State and Local Government Retiree Benefit Plans in California, Michigan, and Oregon
subsections: section_title: State and local government pension plans
paragraphs: Approximately 81% of all  state and local workers  statewideenforcement,  correctional officers,   and firefighters)  sworn correctional  employees)
CalPERS health care program provides  coverage to state employees, retirees, and  their families, by law. In addition, most local  public agencies and school employers can  contract to have CalPERS provide these  benefits to their employees (whether or not  they contract for CalPERS retirement  program). As of 2006, 1,137 entities  participated in the program. Health plans  offered, covered benefits, monthly rates, and  co-payments are determined by the CalPERS  Board, which reviews health plan contracts  annually. Employers make a contribution  toward the member’s monthly premiums, with  members covering the difference between the  employer’s contribution and the actual  premium amount. The employer contribution  rate is normally established through collective  bargaining agreements.  (CalPERS health care program—see above)
Number of  employers   Retiree health benefits  (CalPERS health care program—see above) (closed to legislators  elected on or after  11/7/90) (Not eligible for CalPERS health care  program)
According to a report from the Legislative  Analyst’s Office, schools and community  college districts vary widely in the health  benefits they provide their retirees. For  example, in 2004    114 contracted with CalPERS for  employee and retiree health coverage;    about 265 purchased coverage through 11  benefit trusts, which allow multiple districts  to join together to achieve economies of  scale;    250 participate in the Self-Insured Schools  of California joint powers agency,  administered by Kern County; and  the remaining districts either secure health  benefits on their own or do not provide  these benefits.
The University of California offers continuation  of medical, dental, and legal insurance to  eligible members who elect monthly  retirement income. Health and welfare  benefits are not accrued or vested benefit  entitlements. The University of California’s  contribution toward the cost of medical and  dental coverage is determined by the  University of California and may change or  stop altogether. (If a retiree elects a lump-sum  cashout, all rights to continue retiree medical,  dental, and legal benefits are waived.)
Approximately 19% of all  state and local workers  statewide.
A September 2005 survey by the California  State Association of Counties found that of  the 49 counties responding (of 58 total),  including 8 of the 10 largest counties, 48  reported that retired employees are eligible for  some type of health benefits.
General (all others)
Retirees are entitled to continue membership  in the city’s Health Services System. Any  premiums payable for coverage may be  deducted from the retirement payment.
Percentage participating Social Security (2004)
State and local government pension plans  Pension plans, by  level of administration  Occupations covered  Approximately 87% of all  state and local workers  statewide.
1  Michigan’s Department of Civil Service,  Employee Benefits Division, administers  health insurance contracts for both active and  retired state employees.  For those in the  defined benefit retirement plan (i.e., those  hired before 3/31/97), current health plan  premiums are 95% state-paid for retirees  under age 65, and 100% state-paid for  Medicare-eligible retirees. Dental and vision  premiums are 90% state-paid. For those in  the defined contribution retirement plan, there  is a 10-year vesting requirement with an  employer contribution of 3% for each year of  service, capped at 90%.
Pension plans, by  level of administration  Occupations covered  716  Retirees have the option of health coverage,  which is funded on a cash disbursement basis  by the employers. The system has contracted  to provide the comprehensive group medical,  hearing, dental, and vision coverage for  retirees and beneficiaries. A significant portion  of the premium is paid by the system, with the  balance deducted from the monthly pension.  (Pension recipients generally are eligible for  fully paid master health plan coverage and  90% paid dental, vision, and hearing plan  coverage.)  1  Under the Michigan State Police Retirement  Act, all retirees have the option of continuing  health, dental, and vision coverage. Retirees  with this coverage contribute 5%, 10%, and  10% of the monthly premium amount for the  health, dental, and vision coverage,  respectively. The state funds 95% of the  health and 90% of the dental and vision  insurance.  1  Under state law, all retirees and their  dependents and survivors receive health,  dental, and vision insurance coverage.  159  The Supreme Court Justice, Court of Appeals,  or elected officials may enroll in the state  health plan when they retire and their  premium rate is subsidized. All other judges  may enroll in the state health plan if they wish  to, but they must pay the entire premium cost.  685  MERS Premier Health provides group health  coverage for public employers including  employee and retiree medical, prescription  drug, dental and vision benefits. (MERS also  offers a Group Life and Disability Insurance  Program.)
The city will continue to pay the cost of  hospitalization insurance, in accordance with  collective bargaining agreements and city  council resolutions in effect at the time of  retirement. After age 65, if you are eligible for  Medicare, the city will provide a supplement to  your Medicare benefits. According to city  officials, in the early 1980s, the city instituted  a cost-sharing formula with general city  employees and retirees for the cost of  hospitalization insurance. The formula  included multiple tiers reflecting various  collective bargaining agreements and city  council resolutions. In the last round of  contract negotiations, however, the cost- sharing formula for general city employees  was modified to an 80% city, 20%  employee/retiree split.
Percentage participating Social Security (2004)
Approximately 99% of all  state and local workers  statewide.
School district and  community college  employees  medical and hospital insurance on behalf of  retired members. Members and their  dependents are eligible for OPERS health  care coverage if the member is receiving a  retirement allowance or benefit under the  system. political subdivisions  (optional, but  irrevocable once  elected)
Approximately 1% of all  state and local workers  statewide.
U.S. Bureau of Labor Statistics Data. State and Area Employment, Hours, and Earnings. Not  seasonally adjusted. State and Local Governments, 2006.
Barry T. Hirsch and David A. Macpherson. Union Memerhip nd Erning D Book. The Bureau  of National Affairs, Inc., Washington, D.C.: 2006, Table 5a.
U.S. Census Bureau Data. State and Local Governments Employee-Retirement Systems. 2005 data  file.  tem of Ste nd Locl Government: 2002 (2002  Census of Governments, Volume 4, Number 6, GC02(4)-6) U.S. Government Printing Office,  Washington, D.C.: December 2004, Table 10.
As we went to press, the most recent annual report available online for the Detroit General  Retirement System was for 2005.
section_title: Appendix IV: GASB Statements for Pensions and OPEB
paragraphs: The Governmental Accounting Standards Board (GASB) is an  independent, private sector, not-for-profit organization that establishes  standards of financial accounting and reporting for U.S. state and local  governments. Governments and the accounting industry recognize the  GASB as the official source of generally accepted accounting principles  (GAAP) for state and local governments. GASB standards are intended to  result in useful information for users of financial reports, and to guide and  educate the public—including issuers, auditors, and users—about the  implications of those financial reports. Standards relevant to state and  local government retiree benefits are listed below.
section_title: Appendix V: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Bill J. Keller, Assistant Director;  Amy D. Abramowitz; Joseph A. Applebaum; Susan C. Bernstein; Gregory J.  Giusto; Richard S. Krashevski; Bryan G. Rogowski; Jeremy S. Schwartz;  Margie K. Shields; Jacquelyn D. Stewart; Craig H. Winslow; and Walter K.  Vance made important contributions to this report.
section_title: Bibliography
paragraphs: CanagaRetna, Sujit M.. America’s Public Retirement System [Stresses in  the System]. The Council of State Governments: October 2004.
Employee Benefit Research Institute. Fundamentals of Employee Benefit  Programs, Part Five: Public-Sector Benefits. Chapters 39 through 46.  EBRI: Washington, D.C.: 2005.
Legislative Analyst’s Office. Retiree Health Care: A Growing Cost for  Government. LAO, Sacramento, California: February 17, 2006.
Mattoon, Richard H. “Issues Facing State and Local Government  Pensions.” Federal Reserve Bank of Chicago: Economic Perspectives,  third quarter, 2007.
National Conference on Public Employee Retirement Systems. Public  Pensions & You. NCPERS, Washington, D.C.: 2006.
Rajnes, David. State and Local Retirement Plans: Innovation and  Renovation. (EBRI Issue Brief Number 235) EBRI, Washington, D.C.: July  2001.
Ruppel, Warren. Wiley GAAP for Governments 2007: Interpretation and  Application of Generally Accepted Accounting Principles for State and  Local Governments. John Wiley and Sons, Inc., Hoboken, New Jersey:  February 2007.
Schneider, Marguerite. “The Status of U.S. Public Pension Plans: A Review  with Policy Considerations.” Review of Public Personnel Administration,  Vol. 25, No. 2. June 2005. 107-137.
Schneider, Marguerite, and Fariborz Damanpour. “Public Choice  Economics and Public Pension Plan Funding: An Empirical Test,”  Administration & Society, Vol. 34, No. 1 (March 2002). The article bases  its findings on an analysis of data from the PENDAT (pension data) survey  data of several hundred pension plans (see Harris listing below).
subsections: section_title: Surveys and Studies
paragraphs: Brainard, Keith. Public Fund Survey Summary of Findings for FY 2005.  NASRA, Georgetown, Texas: September 2006. The source of data for this  survey is primarily public retirement system annual financial reports, and  also includes actuarial valuations, benefits guides, system Web sites, and  input from system representatives. The survey is updated continuously as  new data, particularly annual financial reports, become available.
Harris, Jennifer D. 2001 Survey of State and Local Government Employee  Retirement Systems Survey Report. Public Pension Coordinating Council:  March 2002. This report presents summary statistical analysis of state and  local government employee retirement systems surveyed by the Public  Pension Coordinating Council in the summer of 2001. The purpose of the  survey was to obtain in-depth information about the current practices of  public retirement systems regarding their administration, membership,  benefits, contributions, funding, and investments. In 2001, 152 public  employee retirement systems responded to the council’s survey,  representing 263 retirement plans. The data set from this survey is referred  to as PENDAT.
Hirsch, Barry T., and David A. Macpherson. Union Membership and  Earnings Data Book. The Bureau of National Affairs, Inc., Washington,  D.C.: 2006. The Data Book has been published annually since 1994. Each  year’s edition includes current earnings and unionization figures based on  compilations from the Current Population Survey (CPS), the survey of U.S.  households conducted monthly by the U.S. Census Bureau. While data on  earnings and unionization at the national level and highly aggregated  groups of workers are provided by the Bureau of Labor Statistics, the  purpose of the Data Book is to provide these data for states and  metropolitan areas, and for workers within narrowly defined industries  and occupations.
Kaiser Family Foundation and Health Research and Educational Trust.  Employee Health Benefits: 2006 Annual Survey. Kaiser/HRET,  Washington, D.C.: 2006. For this survey, telephone interviews were  conducted with human resource and benefits managers from January to  May 2006, based on a sample of 2,122 employers drawn from a Dun &  Bradstreet list of the nation’s private and public employers with three or  more workers. The sample included 227 state and local governments. Each  employer was asked as many as 400 questions about its largest health  plans, including questions on the cost of health insurance, offer rates,  coverage, eligibility, health plan choice, enrollment patterns, premiums,  employee cost sharing, covered benefits, prescription drug benefits,  retiree health benefits, health management programs, and employer  opinions.
Mercer. Results of Mercer’s Survey of Governmental Employers on GASB  45. Mercer Health & Benefits LLC: 2006. These results were based on 58  responses received from a survey, sent in May 2006, to state, county and  city governments, and to public school boards, colleges, and universities.  The survey was a follow-up to the state and local employers with at least  500 employees that had participated in the 2005 National Survey of  Employer-Sponsored Health Plans.
Moore, Cynthia L., Nancy H. Aronson, and Annette S. Norsman. Is Your  Pension Protected? A Compilation of Constitutional Pension Protections  for Public Educators. AARP, Washington, D.C.: 2000. This publication  provides a compilation of constitutional pension protections in 50 states,  specifically concentrating on retirement systems that serve retired  educators. The descriptions were reviewed by AARP and National Retired  Teachers Association staffs, including the AARP Office of General  Counsel. The constitutional context is current as of July 1998. According  to one of the authors, however, although the report was done several years  ago, there have been few changes in constitutional pension protections in  recent years.
National Association of Government Defined Contribution Administrators,  Inc. 2006 Biennial State and Local Government Defined Contribution  Plan Survey. NAGDCA, Lexington, Kentucky: 2006. This survey is  conducted every 2 years, to obtain specific information on state and local  governments’ 457 and 401(k) plans, and beginning with the 2006 survey, on  their public 401(a) and 403(b) plans as well. The survey includes defined  contribution plans that are the governments’ primary pensions plans, as  well as those that are supplemental voluntary plans. In 2006, responses  were received with information on a total of 105 state and local defined  contribution plans, including 40 state 457 plans, 33 local government 457  plans, 10 state 401(k) plans, 3 local 401(k) plans, 11 state 401(a) plans, 4  local government 401(a) plans, 2 higher education 401(a) plans, 1 state  403(b) plan, and 1 higher education 403(b) plan. According to respondents,  these plans held $87.9 billion in assets, received $6.2 billion in annual  deferrals, and had approximately 1.6 million active participants in 2005.
National Education Association. Characteristics of Large Public  Education Pension Plans. NEA, Washington, D.C.; December 2006.  Information for this publication was gathered between July and September  2006, and was based on consolidated annual financial reports, state  treasurers’ reports, actuarial valuations, system audits, legislative or plan- related review commissions, plan handbooks and newsletters,  departments of human resources’ guidelines for electing trustees, state  legislators’ and governors’ Web sites containing information on legislative  changes, state or local statutes, and publicly available communications  between government officials and plan participants.
Ranade, Neela K. Employer-Sponsored Retiree Health Insurance: An  Endangered Benefit? Congressional Research Service, Domestic Social  Policy Division, Washington, D.C.: April 13, 2006. This report summarizes  the current coverage levels for retiree health insurance for public and  private sector retirees. It outlines the provisions that govern employer  accounting for postretirement health insurance plans in both the public  and private sectors, and describes the public policy options that may be  considered by Congress to address the problems created by the erosion of  employer-sponsored retiree health insurance plans.
Segal. Results of the Segal Medicare Part D Survey of Public Sector Plans.  The Segal Group, Inc., New York, New York: Summer 2006. In May 2006,  the Segal Company, in cooperation with the Public Sector HealthCare  Roundtable, asked public entities about the actions they were considering  for their retiree health care programs as the Medicare Part D program was  being implemented. Responses were received from 109 state and local  plans.
U.S. Bureau of Labor Statistics. Employee Benefits in State and Local  Governments, 1998. (Bulletin 2531) U.S. Department of Labor, Bureau of  Labor Statistics, Washington, D.C.: December 2000. This bulletin presents  the results of the 1998 Bureau of Labor Statistics Employee Benefits  Survey, conducted jointly with the bureau’s Employment Cost Index. It is a  survey of the incidence and detailed provisions of selected employee  benefit plans in state and local governments. In 1998, the survey provides  representative data for 16.5 million employees, and estimates cover all  state and local government establishments in the United States. Data were  collected from June 1998 to November 1998, from a sample of 1,011  government establishments chosen from unemployment insurance  reports. The survey is to be updated again in 2008.
U.S. Census Bureau. Census of Governments. A census of governments is  taken at 5-year intervals as required by law under title 13, United States  Code, Section 161. The 2002 census, similar to those taken since 1957,  covers three major subject fields: government organization, public  employment, and government finances. The unique and important nature  of public employee retirement system data in the world of government  finance requires the Census Bureau to conduct a universe survey each  year (see next listing below). Thus, the starting point for this census of  governments was the 2001 survey listing, which generated a final universe  mail file of approximately 2,670 retirement systems. Results of the 2002  census are summarized in Employee-Retirement Systems of State and  Local Governments: 2002 (2002 Census of Governments, Volume 4,  Number 6, GC02(4)-6) U.S. Government Printing Office, Washington, D.C.:  December 2004.
U.S. Census Bureau. State and Local Governments Employee-Retirement  Systems. An annual survey of public employee retirement systems  administered by state and local governments throughout the nation. The  2005 State and Local Government Public Employee-Retirement Systems  survey covered 2,656 public employee retirement systems for the fiscal  years that ended between July 1, 2004, and June 30, 2005.
U.S. Department of Health and Human Services, Agency for Healthcare  Research and Quality, Medical Expenditure Panel Survey (MEPS).The  Medical Expenditure Panel Survey, which began in 1996, is a set of large- scale surveys of families and individuals, their medical providers (doctors,  hospitals, pharmacies, etc.), and employers across the United States.  MEPS collects data on the specific health services that Americans use,  how frequently they use them, the cost of these services, and how they are  paid for, as well as data on the cost, scope, and breadth of health  insurance held by and available to U.S. workers. The insurance component  of the survey is conducted annually. A nationwide sample of employers,  including state and local governments, is specifically designed so that  national and state estimates of health insurance offerings can be made  each year.
Wisniewski, Stan, and Lorel Wisniewski. State Government Retiree Health  Benefits: Current Status and Potential Impact of New Accounting  Standards. (Workplace Economics, Inc., #2004-08) AARP, Washington,  D.C.: July 2004. This publication is based on information from the  Workplace Economics, Inc., proprietary database, developed over 15  years, on benefits provided to state government employees in all 50 states.  The database is the product of an annual survey of state governments on  their employee benefits as well as an analysis of state employee health  insurance plan documents. In addition, data were gathered and analyzed  from state governments’ annual financial reports.
Workplace Economics, Inc. 2006 State Employee Benefits Survey.  Workplace Economics, Inc., Washington, D.C.: 2006. The information in  this report was collected by means of a written survey sent to all 50 states,  followed by telephone and e-mail contacts to clarify information, and in  some cases by confirmation with official documents or contacts with  employee organizations. Because most states offer multiple sets of  benefits to different groups or categories of employees, survey  respondents were instructed to provide information on benefits that cover  the largest number of employees or that were otherwise deemed  representative. The information reported reflects benefits in effect January  1, 2006.
Zion, David, and Amit Varshney. “You Dropped a Bomb on Me, GASB.”  (Americas/United States Equity Research, Accounting & Tax) Credit  Suisse, New York: March 22, 2007. This report focuses on the OPEB  obligations for each of the 50 states, along with the 25 largest cities in the  United States, based on a review of each state’s comprehensive annual  financial report, as well as other documents such as actuarial studies,  bond offering documents, and U.S. Census data, and phone calls with state  officials. Information was obtained on unfunded OPEB liabilities for 31  states. Among the other 19 states, it was determined that 3 states— Mississippi, Nebraska, and Wisconsin—had no OPEB plans. For the  remaining 16 states, estimates were made by multiplying the number of  full-time equivalent employees for each state (based on 2004 Census data)  by $100,000, a rough estimate based on the data gathered on the 31 states.
section_title: Related GAO Products
paragraphs: State and Local Governments: Persistent Fiscal Challenges Will Likely  Emerge within the Next Decade. GAO-07-1080SP. Washington, D.C.:   July 18, 2007.
Retiree Health Benefits: Majority of Sponsors Continued to Offer  Prescription Drug Coverage and Chose the Retiree Drug Subsidy.   GAO-07-572. Washington, D.C.: May 31, 2007.
Employer-Sponsored Health and Retirement Benefits: Efforts to Control  Employer Costs and the Implications for Workers. GAO-07-355.  Washington, D.C.: March 30, 2007.
Private Pensions: Information on Cash Balance Pension Plans.   GAO-06-42. Washington, D.C.: November 3, 2005.
State Pension Plans: Similarities and Differences Between Federal and  State Designs. GAO/GGD-99-45. Washington, D.C.: March 19, 1999.
Public Pensions: Section 457 Plans Pose Greater Risk than Other  Supplemental Plans. GAO/HEHS-96-38. Washington, D.C.: April 30, 1996.
Public Pensions: State and Local Government Contributions to  Underfunded Plans. GAO/HEHS-96-56. Washington, D.C.: March 14, 1996.
An Actuarial and Economic Analysis of State and Local Government  Pension Plans. PAD-80-1. Washington, D.C.: February 26, 1980.
Funding of State and Local Government Pension Plans: A National  Problem. HRD-79-66. Washington, D.C.: August 30, 1979.