STUMP » Articles » The Real Reason for States Dropping DB Plans: Ever-Increasing Expense » 22 November 2017, 03:50

Where Stu & MP spout off about everything.

The Real Reason for States Dropping DB Plans: Ever-Increasing Expense  

by

22 November 2017, 03:50

Here are parts one and two of tearing apart a recent paper from NCPERS:

Here is the ultimate nub of the paper:

As long as pension plans’ contributions and investment income exceed their annual benefit obligations, the plans can be sustained in perpetuity. (page 11)

John Bury pointed out how key this was as well.

Very true. You could have no assets in a plan (Puerto Rico, Social Security, New Jersey JRS in 2021) and still pay retirees. But you need to get the money from somewhere and it will not be from the retirees (unless you start taxing their benefits) or trust earnings (when assets hit $0). So what these public pension systems turn into are transfer mechanisms dependent on each succeeding generation keeping an increasing onerous promise to a prior generation that never did anything for it, pension-wise. Prefunding mitigates the likelihood of reneging on these obligations and that is exactly what NCPERS is arguing against.

So let’s try out that assumption shall we – in terms of being able to keep up contributions.

CONTRIBUTION HISTORY

The data set I’m using is from the U.S. Census Bureau, and it even breaks out the contributions as State, Local, and Employee contributions. (These are non-overlapping categories, by the way.)

First, let’s look at the contributions in absolute amounts:

Some observations:
- Employee contributions look to be steadily growing. This could be from a level percentage of salary, and a growing payroll. Or increasing percentage of salary. Either way.
- There is a spike in state contributions in 2004. This almost definitely are pension obligation bonds, most specifically, in Illinois. That said, other states did POBs as well.
- The local contributions are growing faster than the other two sources. Perhaps all those stories about pension spending crowding out other local government expenditures aren’t a myth. (read that link for a derisive laugh.)

Now, you can see the absolute amounts – billions of dollars a year – intended to pay for future benefits. Remember from yesterday’s post, these contributions in total are less than the benefits paid each year:

Just keep that one tucked in the back of your mind before I come back to it.

RATE OF CHANGE OF CONTRIBUTIONS

I’m going to put up two graphs of the change in contributions – by each of the three separately, as well as the growth rate of the total (in black).

To start out simply, let’s look at the one-year growth rates, year-over-year.

Yes, that’s ugly. Those fiscal year 2004 POBs distorts the result for the rest of the time. Also, it’s a fairly volatile line, so now I’m going to try something a little more complicated: a 5-year moving average of the rate of growth (geometric average, as these are percentage growth rates).

Now we can see a little more clearly: the overall growth rate in contributions has been about 7% per year in recent years. The growth rate for state contributions has been a bit higher, and that for employee contributions has been a bit lower.

But here’s the concept: an expense that is growing about 7% per year.

Can states and localities keep up with that?

TAX REVENUE GROWTH

I had to go to a separate data source now. The Tax Policy Center has data on state and local government revenues by year. It includes transfers from federal sources… as money is fungible, to be “nice”, I will include the federal funds.

Here is the graph of the total state and local revenues:

Note: I do not know whether these are by tax year or fiscal year. These number series do not necessarily match up exactly in time, though I will do a comparison in a bit.

In case you’re wondering how much of this is federal transfers, here you go:

It’s not a huge amount. The feds keep most of their revenues for themselves. But note how volatile the state/local revenues are – it dropped precipitously in 2009, during the recession. A 20% drop in revenue year-over-year is pretty devastating.

Let’s not even bother with the one-year rate of change, and just jump to the five-year averaged version:

Wow, that is fairly volatile.

CONTRIBUTIONS AS A PERCENTAGE OF REVENUES

As I noted above, there is something of a timing issue. The fiscal years for pension plans don’t necessarily match up with the tax year reporting…

….but hey, close enough.

Let’s take a look at the contributions as a percentage of those state/local revenues, shall we?

That spike in 2009 is due to the recession – it’s not that the contributions went up, but that revenues dropped 20%.

The troubling trend is the post-2010 increase in percentage – the contributions are rising faster than revenues are.

And this is why various entities are looking to transition from DB to DC pensions — at least with DC plans, you just dictate the percentage being contributed and then you don’t worry about what kind of retirement income the recipients can generate.

I agree with those who think this is not a good development, but many of these people also think that status quo ante can continue.

I don’t think that’s true.

Underlying spreadsheet here.

ENJOY THANKSGIVING

I may return to NCPERS’s specious reasoning at a later date. A poster at the Actuarial Outpost gave me an idea, but it will take me a little bit to work it through; also, I have some info I pulled from the Census data set that gives asset allocation information… and I’m thinking of doing a by-state analysis.

That is going to take a lot of time… and I’m not getting paid for it.

So for right now, I say enjoy Turkey Day (though, we’re having the food of our people: barbecue. Which is pork, with vinegar-based sauce. As is the only proper barbecue.)

And we will be enjoying the traditional Thanksgiving Day viewing — yup, an MST3K marathon!

See y’all next week! Maybe!


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