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SaintPetersblog: FSU study highlights best practices in public pension management

Tuesday, August 06, 2013

There are about 500 municipal pension plans published by the Florida Department of Management Services, each of which has a unique configuration of management and funding policies, begging the question of whether best practices in pension management may be identified to improve (or in some cases, save) the health of such plans.

Over the past decade, Florida’s municipal pension plans have gone deeper in the red, straining city budgets with returns on investment that are not keeping up with liabilities.  Yet according to a report just published by the Florida State University LeRoy Collins Institute, not all of Florida’s municipal pensions are suffering, and to the contrary, many are in good condition and well-funded.  The Collins team found that these healthy plans more likely to follow nationally-recognized “best practices” in public pension management — a finding which validates these guidelines and offers various options for struggling plans to adopt.

Plans were rated first based on their ratio of actual pension assets to actuarial liabilities, and were placed into five categories based on their funded ratio.  In about equal parts, one-quarter of plans were each funded at less than 60%, 60 to 70%, and 70 to 80%, respectively.  About 17% of Florida’s municipal plans are funded at 80 to 90%, qualifying as being in good condition based on US Government Accountability Office standards; and another 9% are funded at greater than 90%, bringing the total to 26% for healthy municipal pensions.

Broken down by types of plans, about 30% of general employee and police plans are in good condition, about 25% of firefighter plans, and about 15% of the combined police and firefighter plans.

The Collins team found that healthy plans were more likely to: (1) fund annual pension contributions at 100% or more of the annual required contribution, (2) require employees share in the cost of pension plans, (3) limit the size of cost-of-living adjustments, (4) limit the ability of employees to engage in pension spiking, and (5) set realistic actuarial assumptions.

“In recent months, attention to public sector pensions…has focused on the financial sustainability of the promises Florida cities have made to their retirees,” the report states. “The next step is delving more deeply into the commitments made and the administration of the plans, including management of the funds.”

The report goes on to conclude that while there is no clear blueprint for good public pension plan management, Florida’s healthiest pensions today are those that tend to make decisions to balance taxpayer and retiree interests in ways consistent with these five characteristics.

“In the midst of Florida’s municipal pension woes, the LeRoy Collins Institute has been leading the way with innovative research and recommendations for local governments to put their pension plans on the right track,” said Dr. Carol Weissert, political science professor and LCI director. “In this latest research report, we’ve highlighted ‘best practices’ that can serve as guidance for struggling local pension plans or those that simply want to improve.”

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