FEBRUARY 9, 2017/ BERKELEY, CA: The Just Public Finance Program of the Haas Institute for a Fair and Inclusive Society released a new research brief on the implications of public financial management that aims for public pensions to be fully-funded. Titled “Funding Public Pensions: Is Full Funding a Misguided Goal?” this report highlights some of the effects of generally accepted accounting rules for public pensions. Some consequences are detrimental to retirees, public employees, cities, and states. City and state finances affect all their residents. Fully-funded pensions have the potential to waste money when it could be redirected elsewhere—this is a concern for everyone, not just pensioners and public employees.
“Sustainably-funded pension systems and fully-funded pension systems are not the same thing,” says Wendy Ake, director of the Just Public Finance program. “When city and state budgets are already strapped for cash, people are startled by the dollars required to get to full funding. There are big problems, but not from so-called ‘extravagant’ pension benefits.”
The report argues that the accounting rules used to evaluate a pension system are part of the problem. The current accounting rules, “not only make the problem seem worse than it is, the rules actively make things worse,” says report author Sgouros.
The paper examines the logic behind accounting professionals advice that public pensions be fully funded as private pensions must be. The report argues that this logic doesn’t apply to public pensions, since municipalities and states don’t face the same risks as companies. The paper is accompanied by a CalSTRS data-based online visualization modeling the sustainability of a partially-funded pension plan—underscoring its viability and ability to fulfill current and future obligations.
“Pensioner benefits aren’t extravagant—the accounting rules generate extravagant dollar figures that people feel must be found in budgets to meet a goal that has questionable benefits,” says Ake. “To protect public pensions and make city and state finances reasonable and fair for our neighbors, including seniors, we have to include inspection of public finance accounting rules.”
The study suggests different practices that could create healthier pension systems and better serve retirees, public employees, and the residents of those cities and states. These suggestions include alternative accounting rules and alternative funding averages in order to offer more predictability. These options, and more, could protect public pensions and people directly and indirectly dependent upon them.
“This is also a question of equity and inclusion,” Ake says. “The public sector is the leading employment sector for African American and Latinx neighbors, and the public sector, in comparison with the private sector, can offer unique opportunities for other groups including women and people with disabilities. Attending to public pensions is a way to extend critical benefits to many groups and communities often neglected by public investments and the private sector.
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Just Public Finance Program
Haas Institute for a Fair and Inclusive Society
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Partially-funded pension data visualization