State and local government retirement systems in strong financial condition.

• Author: Zorn, Paul

A 1997 survey of 261 state and local government retirement systems reports that the average percentage of benefits earned increased only marginally from 1994 to 1996, plan funding ratios continued their growth trend, and investments showed movement into equity securities.

This article summarizes key findings from the 1997 Survey of State and Local Government Employee Retirement Systems, conducted by the Public Pension Coordinating Council (PPCC).(1) In general, the survey shows state and local retirement systems to be well funded and in sound financial health. While pension liabilities grew between 1994 and 1996, pension assets grew also, resulting in a marked improvement in retirement plan funding. In addition, benefit formulas remained stable, and the systems experienced strong investment returns over the period.

The survey results are drawn from 261 state and local government retirement systems, representing 379 retirement plans and covering 81 percent of the 13.6 million active employees covered by such plans, as reported by the U.S. Bureau of the Census. The respondents were generally representative of state and local retirement systems in the U.S., being widely distributed among each of the major geographic regions, system size categories, and categories of covered employees. The remainder of this article will present the major survey findings in more detail.

Retirement Benefits

The vast majority of the respondents provide retirement benefits through defined benefit plans. Typically, these plans promise to pay benefits based on formulas that include employees' years of service, age at retirement, and final average salary. Often the formula is expressed as an annual benefit percentage (e.g., 2.0 percent) multiplied by years of service and final average salary. Final average salary, in turn, is often computed as the average annual salary for the highest (or last) three or five years of service.

State and local government employees are not universally covered under the federal Old Age, Survivors, Disability, and Health Insurance (OASDI) programs, commonly referred to as Social Security. Estimates made by the U.S. Department of Labor indicate that approximately 76 percent of current state and local full-time employees are covered by Social Security, although coverage varies among the different groups of employees. Although state and local plans typically do not specifically integrate Social Security into their benefit formulas, they often offer a higher annual benefit percentage to plan members who are not covered by Social Security than to those who are covered. This partially compensates the lower overall retirement income received by the...