The National Association of State Retirement Administrators, (NASRA) has rejected the findings of a recent report on public pension funding from the American Legislative Exchange Council (ALEC), saying the findings contain “serious flaws.”
The ALEC report claimed that US public pension plans are far more underfunded than they report, and that the aggregate unfunded liability of all plans exceeds $6 trillion, with a funding level of approximately 33%. However, NASRA said that using “current, prevailing actuarial methods” for valuing liabilities, public pensions report an aggregate unfunded liability of approximately $1.5 trillion, and a funding ratio of around 70%.
NASRA said its main problems with ALEC’s report on 280 state-administered public pension plans is that its conclusions are based on the use of a below-market, risk-free interest rate to calculate the funding condition; it “erroneously states” that using a risk-free rate for funding is endorsed by the Society of Actuaries; and it “ignores the variable nature of benefit structures and financing arrangements in many public pension plans,” rather than assign all public pension liabilities and costs to employers and taxpayers.
NASRA also argued the report implies that only a few states have enacted modifications to their retirement systems, “even though every state has recently made changes to one or more of its pension plans,” and claims that public pension reporting and transparency is inadequate, “when, in fact, public pensions are highly transparent and a public database of state level plans already exists.”
ALEC’s report used a discount rate “derived from a short, cherrypicked time period,” said NASRA, which was calculated using a “so-called” risk-free investment return of 2.14%. NASRA said a risk-free rate “is not helpful for calculating pension funding information,” and that the outcome of this calculation should not be used to characterize plans’ funding condition.
“By ALEC’s admission, this is a synthetic rate manufactured by averaging the yield on 10- and 20-year bonds from April 2016 to March 2017,” said NASRA, “an unconventional window to measure financial data, and one that featured atypically low rates even in the current low-rate environment.”
It added that the rate used by ALEC is lower even than the current yield on 10-year US Treasury bonds, which is just under 2.5%, and that rates used for corporate pension plans are currently around 4.0%.
“It is only through the use of a rate as low as the one used in the report that ALEC finds ‘every single state would be considered at risk of defaulting on their pension obligations,’” said NASRA. “Using current interest rates, particularly from such an oddly brief and irrelevant period of time, to calculate long-term funding requirements, and to characterize the funding condition of a pension plan that will continue to operate for decades, is incongruous with the way plans actually are funded.”