State and Local Pension Fund Management

by Peng; Jun

ISBN13: 9780849305481

ISBN10: 0849305489

Format: Hardcover

Pub. Date: 2008-08-21

Publisher(s): Routledge

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Summary

Intense media coverage of the public pension funding crisis continues to fuel heightened awareness in and debate over public pension benefits. With over $3 trillion in assets currently under management, the ramifications of poor oversight are severe. It is important that practitioners, researchers, and taxpayers be well-advised regarding any concerns, but until now traditional references have provided very little coverage.

Preface	p. xvii
Acknowledgment	p. xix
About the Author	p. xxi
Overview	p. 1
Retirement Benefits	p. 2
Examining the State and Local Pension Plan Management	p. 3
A Brief History of State and Local Public Pension Plans	p. 6
Pre-1940 History	p. 6
Post-1940 History	p. 7
Public and Private Sector Pension Benefits	p. 9
State and Local Pension Systems	p. 10
Public Pension Systems, Plans, and Funds	p. 10
Types of Public Pension Plans	p. 12
Historical Data on the Number of Pension Systems	p. 13
Breakdown between State- and Local-Level Pension Systems	p. 14
Growth of Public Pension System Assets	p. 17
Pension Asset Growth	p. 17
Source of Pension Asset Growth	p. 18
Sufficiency of Pension Asset Growth	p. 21
Overview	p. 23
References	p. 24
Appendix	p. 26
Pension Benefit Design	p. 29
Regular Service-Related Benefits	p. 29
Normal Service Benefit	p. 30
Benefit Multiplier	p. 30
Final Average Salary	p. 33
Years of Service	p. 34
Requirement for Normal Retirement Benefits	p. 36
State Income Tax Treatment	p. 37
Early Retirement Benefit	p. 37
Early Retirement Incentive Program	p. 39
Postemployment Benefit Adjustment	p. 40
Purchase of Service Credits	p. 41
Types of Service and Years of Service to Be Purchased	p. 43
Cost of Purchase and Its Payment	p. 43
Ancillary Benefits	p. 45
Disability Benefits	p. 45
Death Benefits	p. 46
Health Benefits	p. 47
Withdrawal Benefits	p. 47
Deferred Retirement Option Plan (DROP) Program	p. 47
Major Features of DROP	p. 47
Pros and Cons of DROP	p. 49
DROP Design Issues	p. 50
Adequacy of Public Pension Benefits	p. 51
Finding the Replacement Ratio	p. 52
Adequacy of the Public Pension Benefit	p. 53
Summary	p. 55
References	p. 56
Actuarial Valuation and Financial Reporting	p. 57
Assumptions	p. 58
Demographic Assumptions	p. 58
Economic Assumptions	p. 59
Actuarial Cost Methods	p. 60
Classification of Actuarial Cost Methods	p. 61
Projected Unit Credit (PUC) Cost Method	p. 62
Normal Cost	p. 62
Accrued Liability	p. 63
Example	p. 64
Unfunded Accrual Actuarial Liability (UAAL) and Amortization	p. 64
Entry Age Normal (EAN) Actuarial Cost Method	p. 66
Normal Cost under Level Dollar Method	p. 67
Accrued Liability under Level Dollar Method	p. 67
Entry Age Normal (EAN) Using Level Percentage	p. 68
Example	p. 68
Comparison between EAN and PUC	p. 70
Aggregate Cost Method	p. 71
UAAL	p. 71
Aggregate Cost Method	p. 72
Frozen Entry Age Cost Method	p. 73
Asset Valuation	p. 74
Financial Reporting and Accounting Standards	p. 75
GASB 25	p. 76
Reporting Framework	p. 76
Parameters	p. 80
GASB 27	p. 82
GASB Statement 50	p. 84
References	p. 84
Governing Public Pension Plans	p. 85
ERISA	p. 85
ERISA Standards	p. 86
ERISA and Public Pension Plans	p. 88
Public Pension Benefit Protection	p. 88
Public Pension Plan Administration	p. 92
Pension Plan Administration: The Governing Board	p. 92
Election of Trustees to the Board	p. 93
Board's Fiduciary Responsibility Standard	p. 93
Conflict of Interest Rule and Code of Ethics	p. 94
The Board's Main Functions	p. 95
Pension Plan Administration: The Staff	p. 96
Member Service	p. 96
Supporting Services	p. 98
Investment Management	p. 99
Risk Management and Control	p. 99
Financial Reporting	p. 100
Funding Policy	p. 101
Public Pension Plan Oversight	p. 103
Legislative Committee	p. 104
Independent Pension Commission	p. 105
Other Oversight Mechanisms	p. 107
References	p. 108
Investment Management	p. 111
Overall Objective of Investment Management	p. 111
Portfolio Diversification	p. 112
The Theory	p. 112
Asset Classes	p. 114
Traditional Investments	p. 115
Alternative Investments	p. 118
Investment Policy	p. 120
Investment Objective and Risk	p. 120
Legal List to Control Risk	p. 122
Asset Allocation	p. 123
Roles and Responsibilities	p. 125
Responsibilities of the Board of Trustees	p. 125
Responsibilities of Internal Investment Staff	p. 126
Responsibilities of Investment Consultant	p. 127
Responsibilities of Investment Managers	p. 127
Responsibilities of Custodian	p. 128
Performance Measurement	p. 128
Calculating Investment Return	p. 128
Measuring Investment Managers' Performances	p. 129
Measuring Total Portfolio Performance	p. 131
Rebalancing	p. 133
Implementation Strategy	p. 133
Passive versus Active Management	p. 134
Internal versus External Management	p. 136
Summary	p. 138
References	p. 138
Pension Plan Management and the Operating Budget	p. 141
Underfunded Pension Plans	p. 142
Fiscal Illusion and Fiscal Stress	p. 143
How to Deal with Pension Underfunding	p. 144
Benefits of POB	p. 145
Risks of POB	p. 145
Overfunded Pension Plan	p. 147
Case Studies	p. 149
Illinois State Pension Systems	p. 150
Underfunding of Pension Contribution	p. 150
Pension Benefit Increase	p. 152
New Jersey Pension System	p. 153
Reduction in Pension Contribution	p. 154
Pension Benefit Increase	p. 156
Consequence	p. 157
New York State and Local Retirement System	p. 159
Pension Contribution Reduction by Governor	p. 159
Pension Contribution Reduction by Comptroller	p. 162
Consequence	p. 163
West Virginia Retirement System	p. 164
Underfunding of Pension Contribution	p. 164
State Efforts to Reduce Unfunded Liability	p. 166
Florida Retirement System	p. 168
Steady Asset Growth	p. 168
Constraint on Pension Benefit Increase	p. 171
Summary	p. 172
Pension Contribution Stabilization Methods	p. 173
Fixed Contribution Rates	p. 173
Minimum Contribution	p. 174
Indexing Contribution Rate to Prior Year's Level	p. 175
Corridor Funding	p. 175
Pension Fund Surplus Reserve	p. 176
Extend Pension Surplus Amortization	p. 176
Extend Asset Smoothing Period	p. 177
Summary	p. 177
References	p. 178
Defined Contribution Pension Plan	p. 181
Defined Benefit (DB) Plan	p. 182
Advantages of a Defined Benefit Plan	p. 182
Disadvantages of a Defined Benefit Plan	p. 183
Some Evidence of Defined Benefit Plan Risks	p. 185
Defined Contribution (DC)	p. 186
Advantages of the Defined Contribution Plan	p. 187
Disadvantages of the Defined Contribution Plan	p. 187
Pension Benefit Certainty	p. 188
Investment	p. 190
Disability Benefit	p. 191
Summary	p. 191
Public Sector Defined Contribution Plan Experience	p. 192
Mandatory Participation in Exclusive DC Plan	p. 192
Optional Participation in Exclusive Defined Contribution Plan	p. 193
Mandatory Participation in Hybrid Plan	p. 194
Optional Participation in the Hybrid Plan	p. 195
Summary	p. 196
Cash Balance Plan	p. 196
Cash Balance Plan	p. 197
Cash Balance Plan versus Defined Benefit Plan	p. 198
Cash Balance Plan versus Defined Contribution Plan	p. 199
Summary	p. 200
Nebraska Cash Balance Plan	p. 201
California Cash Balance Plan	p. 203
Defined Contribution Plan Design Issues	p. 203
Conclusion	p. 207
References	p. 208
Other Postemployment Benefits	p. 211
Healthcare for Retirees	p. 212
GASB Statements 43 and 45	p. 213
Brief History of GASB Statements on OPEB Reporting	p. 213
GASB Statement 43	p. 214
Financial Reporting Framework	p. 215
Parameters	p. 215
Implicit Subsidy Rate	p. 217
GASB Statement 45	p. 218
Financial Implication of GASB Statements 43 and 45	p. 218
Dealing with OPEB Liability	p. 219
Prefunding OPEB Liability	p. 220
OPEB Trust Fund	p. 220
OPEB Bond	p. 221
Reducing Health Benefits	p. 222
Legal Perspective	p. 223
Reducing Health Benefits	p. 224
Defined Contribution Health Benefit Plan	p. 226
Cash Contribution	p. 227
Converting Unused Sick Leave into Cash Contribution	p. 228
References	p. 229
Looking Forward	p. 231
Managing Pension Liability Growth	p. 233
Limiting Pension Benefit Increase	p. 233
Increasing Retirement Age	p. 235
Pension Benefit Level	p. 237
Containing the Negative Effect of Spiking	p. 239
Early Retirement Incentive Program	p. 239
Pension Obligation Bond	p. 240
Managing Pension Asset Growth	p. 240
Pension Funding Policy	p. 240
Smooth Pension Contribution Rate	p. 242
Investment Return	p. 242
Changing Pension Benefit Design	p. 243
Hybrid Plan	p. 243
Cost of Living Adjustment (COLA)	p. 244
Conclusion	p. 244
References	p. 245
Index	p. 247
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