State and Local Pension Fund Management Public Administration and Public Policy 1st Edition by Jun Peng 1040180035 9781040180037

Chapter 1: Overview

1.1 Retirement Benefits

1.2 Examining the State and Local Pension Plan Management

1.3 A Brief History of State and Local Public Pension Plans

1.3.1 Pre-1940 History

1.3.2 Post-1940 History

1.4 Public and Private Sector Pension Benefits

1.5 State and Local Pension Systems

1.5.1 Public Pension Systems, Plans, and Funds

1.5.2 Types of Public Pension Plans

1.5.3 Historical Data on the Number of Pension Systems

1.5.4 Breakdown between State- and Local Level Pension Systems

1.6 Growth of Public Pension System Assets

1.6.1 Pension Asset Growth

1.6.2 Source of Pension Asset Growth

1.6.3 Sufficiency of Pension Asset Growth

1.7 Overview

References

Chapter 2: Pension Benefit Design

2.1 Regular Service-Related Benefits

2.1.1 Normal Service Benefit

2.1.1.1 Benefit Multiplier

2.1.1.2 Final Average Salary

2.1.1.3 Years of Service

2.1.1.4 Requirement for Normal Retirement Benefits

2.1.1.5 State Income Tax Treatment

2.1.2 Early Retirement Benefit

2.1.2.1 Early Retirement Incentive Program

2.1.3 Postemployment Benefit Adjustment

2.1.4 Purchase of Service Credits

2.1.4.1 Types of Service and Years of Service to Be Purchased

2.1.4.2 Cost of Purchase and Its Payment

2.2 Ancillary Benefits

2.2.1 Disability Benefits

2.2.2 Death Benefits

2.2.3 Health Benefits

2.2.4 Withdrawal Benefits

2.3 Deferred Retirement Option Plan (DROP) Program

2.3.1 Major Features of DROP

2.3.2 Pros and Cons of DROP

2.3.3 DROP Design Issues

2.4 Adequacy of Public Pension Benefits

2.4.1 Finding the Replacement Ratio

2.4.2 Adequacy of the Public Pension Benefit

2.4.3 Summary

References

Chapter 3: Actuarial Valuation and Financial Reporting

3.1 Assumptions

3.1.1 Demographic Assumptions

3.1.2 Economic Assumptions

3.2 Actuarial Cost Methods

3.2.1 Classification of Actuarial Cost Methods*

3.2.2 Projected Unit Credit (PUC) Cost Method

3.2.2.1 Normal Cost

3.2.2.2 Accrued Liability

3.2.2.3 Example

3.2.2.4 Unfunded Accrual Actuarial Liability (UAAL) and Amortization

3.2.3 Entry Age Normal (EAN) Actuarial Cost Method

3.2.3.1 Normal Cost under Level Dollar Method

3.2.3.2 Accrued Liability under Level Dollar Method

3.2.3.3 Entry Age Normal (ΕAΝ) Using Level Percentage

3.2.3.4 Example

3.2.4 Comparison between ΕAΝ and PUC

3.2.5 Aggregate Cost Method

3.2.5.1 URAL

3.2.5.2 Aggregate Cost Method

3.2.6 Frozen Entry Age Cost Method

3.3 Asset Valuation

3.4 Financial Reporting and Accounting Standards

3.4.1 GASB 25

3.4.1.1 Reporting Framework

3.4.1.2 Parameters

3.4.2 GASB 27

3.4.3 GASB Statement 50

References

Chapter 4: Governing Public Pension Plans

4.1 ERISA

4.1.1 FRISA Standards

4.1.2 ERISA and Public Pension Plans

4.2 Public Pension Benefit Protection

4.3 Public Pension Plan Administration

4.3.1 Pension Plan Administration: The Governing Board

4.3.1.1 Election of Trustees to the Board

4.3.1.2 Board’s Fiduciary Responsibility Standard

4.3.1.3 Conflict of Interest Rule and Code of Ethics

4.3.1.4 The Board’s Main Functions

4.3.2 Pension Plan Administration: The Staff

4.3.2.1 Member Service

4.3.2.2 Supporting Services

4.3.2.3 Investment Management

4.3.3 Risk Management and Control

4.3.4 Financial Reporting

4.3.5 Funding Policy

4.4 Public Pension Plan Oversight

4.4.1 Legislative Committee

4.4.2 Independent Pension Commission

4.4.3 Other Oversight Mechanisms

References

Chapter 5: Investment Management

5.1 Overall Objective of Investment Management

5.2 Portfolio Diversification

5.2.1 The Theory

5.2.2 Asset Classes

5.2.2.1 Traditional Investments

5.2.2.1.1 Equity

5.2.2.1.2 Fixed-Income Securities

5.2.2.1.3 Real Property

5.2.2.1.4 Cash and Cash Equivalents

5.2.2.2 Alternative Investments

5.2.2.2.1 Private Equity

5.2.2.2.2 Hedge Fund

5.2.2.2.3 Real Property

5.3 Investment Policy

5.3.1 Investment Objective and Risk

5.3.2 Legal List to Control Risk

5.3.3 Asset Allocation

5.3.4 Roles and Responsibilities

5.3.4.1 Responsibilities of the Board of Trustees

5.3.4.2 Responsibilities of Internal Investment Staff

5.3.4.3 Responsibilities of Investment Consultant

5.3.4.4 Responsibilities of Investment Managers

5.3.4.5 Responsibilities of Custodian

5.3.5 Performance Measurement

5.3.5.1 Calculating Investment Return

5.3.5.2 Measuring Investment Managers’ Performances

5.3.5.2.1 Benchmark Return

5.3.5.2.2 Peer Group Comparison

5.3.5.2.3 Compliance

5.3.5.3 Measuring Total Portfolio Performance

5.3.6 Rebalancing

5.4 Implementation Strategy

5.4.1 Passive versus Active Management

5.4.2 Internal versus External Management

5.4.3 Summary

References

Chapter 6: Pension Plan Management and the Operating Budget

6.1 Underfunded Pension Plans

6.1.1 Fiscal Illusion and Fiscal Stress

6.1.2 How to Deal with Pension Underfunding

6.1.2.1 Benefits of POB

6.1.2.1 Risks of POB

6.2 Overfunded Pension Plan

6.3 Case Studies

6.3.1 Illinois State Pension Systems

6.3.1.1 Underfunding of Pension Contribution

6.3.1.2 Pension Benefit Increase

6.3.2 New Jersey Pension System

6.3.2.1 Reduction in Pension Contribution

6.3.2.2 Pension Benefit Increase

6.3.2.3 Consequence

6.3.3 New York State and Local Retirement System

6.3.3.1 Pension Contribution Reduction by Governor

6.3.3.2 Pension Contribution Reduction by Comptroller

6.3.3.3 Consequence

6.3.4 West Virginia Retirement System

6.3.4.1 Underfunding of Pension Contribution

6.3.4.2 State Efforts to Reduce Unfunded Liability

6.3.5 Florida Retirement System

6.3.5.1 Steady Asset Growth

6.3.5.2 Constraint on Pension Benefit Increase

6.3.6 Summary

6.4 Pension Contribution Stabilization Methods

6.4.1 Fixed Contribution Rates

6.4.2 Minimum Contribution

6.4.3 Indexing Contribution Rate to Prior Year’s Level

6.4.4 Corridor Funding

6.4.5 Pension Fund Surplus Reserve

6.4.6 Extend Pension Surplus Amortization

6.4.7 Extend Asset Smoothing Period

6.4.8 Summary

References

Chapter 7: Defined Contribution Pension Plan

7.1 Defined Benefit (DB) Plan

7.1.1 Advantages of a Defined Benefit Plan

7.1.2 Disadvantages of a Defined Benefit Plan

7.1.3 Some Evidence of Defined Benefit Plan Risks

7.2 Defined Contribution (DC)

7.2.1 Advantages of the Defined Contribution Plan

7.2.2 Disadvantages of the Defined Contribution Plan

7.2.2.1 Pension Benefit Certainty

7.2.2.2 Investment

72.2.3 Disability Benefit

7.2.3 Summary

7.3 Public Sector Defined Contribution Plan Experience

7.3.1 Mandatory Participation in Exclusive DC Plan

7.3.2 Optional Participation in Exclusive Defined Contribution Plan

7.3.3 Mandatory Participation in Hybrid Plan

7.3.4 Optional Participation in the Hybrid Plan

7.3.5 Summary

7.4 Cash Balance Plan

7.4.1 Cash Balance Plan

7.4.2 Cash Balance Plan versus Defined Benefit Plan

7.4.3 Cash Balance Plan versus Defined Contribution Plan

7.4.4 Summary

7.4.5 Nebraska Cash Balance Plan

7.4.6 California Cash Balance Plan

7.5 Defined Contribution Plan Design Issues

7.6 Conclusion

References

Chapter 8: Other Postemployment Benefits

8.1 Healthcare for Retirees

8.2 GASS Statements 43 and 45

8.2.1 Brief History of GASB Statements on OPEB Reporting

8.2.2 GASS Statement 43

8.2.2.1 Financial Reporting Framework

8.2.2.2 Parameters

8.2.2.3 Implicit Subsidy Rate

8.2.3 GASB Statement 45

8.2.4 Financial Implication of GASS Statements 43 and 45

8.3 Dealing with OPEB Liability

8.3.1 Prefunding OPEB Liability

8.3.1.1 OPEB Trust Fund

8.3.1.2 OPEB Bond

8.3.2 Reducing Health Benefits

8.3.2.1 Legal Perspective

8.3.2.2 Reducing Health Benefits

8.3.3 Defined Contribution Health Benefit Plan

8.3.3.1 Cash Contribution

8.3.3.2 Converting Unused Sick Leave into Cash Contribution

References

Chapter 9: Looking Forward

9.1 Managing Pension Liability Growth

9.1.1 Limiting Pension Benefit Increase

9.1.2 Increasing Retirement Age

9.1.3 Pension Benefit Level

9.1.4 Containing the Negative Effect of Spiking

9.1.5 Early Retirement Incentive Program

9.1.6 Pension Obligation Bond

9.2 Managing Pension Asset Growth

9.2.1 Pension Funding Policy

9.2.2 Smooth Pension Contribution Rate

9.2.3 Investment Return

9.3 Changing Pension Benefit Design

9.3.1 Hybrid Plan

9.3.2 Cost of Living Adjustment (COLA)

9.4 Conclusion

References

Index