30 JULY / AUGUST 2017 DIRECTORS / SENIOR MANAGEMENT Connecticut’s governor recently proposed forcing local municipalities to assume part of the state’s pension liabilities for teachers, thereby reducing the state’s burden. This raises questions of what caused the need for this extreme proposal, and if similar actions could follow elsewhere. Better transparency of pension liabilities makes the need for reform of pension plans increasingly apparent. Many plans’ unfunded liabilities are growing, which creates the need to make tough decisions about how to best manage those liabilities going forward. To understand why such a drastic measure was proposed, we must first understand the difficulty of funding defined-benefit pension plans. Growth of Net Pension Liabilities Defined-benefit pension plans promise employees specific benefits during retirement, despite investment performance. Employers gradually fund pension liabilities with annual contributions and investment returns, and net pension liabilities (NPLs) should decline over time, as employers work toward a fully funded plan. However, Exhibit 1 reveals that adjusted NPLs (ANPLs) aggregated for states have been increasing, according to Moody’s. Moody’s also projects that the combined ANPLs for states will grow from $1.25 trillion in 2015 to $1.75 trillion in 2017. The state ANPL appears to decrease slightly in 2015, due to the transfer of some liabilities to local municipalities. The GASB* standard that now requires municipalities to recognize their proportionate liability of shared plans also allows the plan sponsor (usually the state) to remove that same amount from their books. The Baker Group’s internal database exposes a collective increase in local net pension liabilities of over $73 billion for those municipalities that have reported their 2016 financials already. Less than 10 percent of the municipalities for which we have 2015 and 2016 financials experienced a decrease in their NPLs in 2016, and over 20 percent had NPLs that more than doubled. The Growing Burden of underfunded public pensions The Baker Group is a Preferred Service Provider of the Indiana Bankers Association and an IBA Diamond Associate Member. Article author Dana Sparkman Municipal Analyst The Baker Group dana@gobaker.com EXHIBIT 1
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