The Essential Pension Policies Elements to Adopt Now

By Julio F. Morales, Director, UFI

Tackling the growing pension and OPEB liabilities of state and local public agencies will likely be the most significant challenge many government finance officers face during their career.

After nine years of strong revenue growth and consecutive positive investment performance, a substantial pension funding gap remains for most public agencies. The funded status for the entire CalPERS’ Public Employees Retirement Fund (PERF) is approximately 70%, after an investment return of 6.70% and 8.60% for the fiscal years ending June 30, 2019 and June 30, 2018 respectively.

Pension and OPEB liabilities are dynamic. A public agency’s funding level depends on a number of variables, including contribution amounts, benefit levels, investment performance, inflation, actuarial assumptions and plan adjustments.

In accordance with GFOA’s recommendations, every public agency should consider retaining an independent financial advisor that specializes in pension/OPEB issues. This specialist will be able to help the public agency understand the financial impact of its long-term liabilities, develop a custom pension/OPEB model, conduct financial projections, evaluate options, and make recommendations.

Addressing pension/OPEB liabilities requires long-term, sustained financial discipline by a public agency. After studying the issue, evaluating the options, and developing a plan of attack, every public agency should adopt appropriate pension/OPEB funding policies to reinforce the required discipline and keep the agency on-track.

The Importance of Pension/OPEB Funding Policies

  • Pension and OPEB funding policies are important because collectively they will:
  • Lay out a financial plan to address your agency’s pension/OPEB liabilities;
  • Provide guidance in making budget decisions and how to use excess or one-time monies;
  • Demonstrate prudent financial management and improve the agency’s credit rating ; and
  • Illustrate to employees and the public the agency’s commitment and plan for responsibly addressing its pension/OPEB liabilities.

Policies should be tailored to reflect each agency’s financial circumstances and policy objectives.

Elements of Pension/OPEB Funding Policies

The Basics – In adopting a strong set of pension and OPEB funding policies, we recommend public agencies consider incorporating the following basic elements: