Federal, State, and Local Government Pension Plans

Public plans represent a substantial level of retirement income promises for federal, state, and local employees. Benefit levels promised in public plans exceed those of the private sector. Public plans exist free of federal regulatory controls like those imposed by ERISA. 

Public employee pension programs are receiving a considerable amount of attention today because of the sharp increases in current appropriations necessary to support retirement programs, the increased activism of public plans in the realm of corporate governance, and the greater frequency of public pension purchases of public debt to "bail out" deficits. Federal regulation of private plans has given rise to a congressional commitment to the study of public plans and to an assessment of whether a public plan version of ERISA should be enacted.

Research has revealed that large cities with their own pension plans are likely to provide some of the most generous benefits available in the public sector. Public employees generally have more liberal early retirement provisions in their pension plans than private employees, and public plans usually include a provision for automatic increases in retirees' benefits when the cost of living increases.

State and local plans are viewed by many as being underfunded as a group. Actuarial, financial, auditing, and disclosure requirements are viewed as deficient. Many charge that fiduciary standards are seriously breached. Other characteristics of public plans have led to criticisms, including the following:

§  Their retirement benefits replace a substantial percentage of final pay after only 20 to 25 years of service.

§  Their normal retirement ages are set well ahead of the end of productive working lifetimes.

§  They are generous in granting a high proportion of early disability retirements in "high risk" professions (police, firefighters, and the like), rather than retaining the workforce in less hazardous positions.

There is also substantial concern because some federal, state, and local employees currently are not covered by the Social Security program. Because of noninclusion, or lack of integration when both programs are involved, there is a belief that public employees obtain "windfall" benefits or unnecessarily large benefits, or both. For example, a recent government study indicated that income replacement ratios for public employees serving 30 years at average wages received more than 100 percent of salary in 53 percent of all cases, and 125 percent of salary in more than 10 percent of all cases.

These and other issues have led to the development of state commissions to advise state legislators on pension issues. The threat of an impending federal intervention in the form of the Public Employee Retirement Income Security Act (PERISA) has stimulated efforts in many states to monitor state and local pension funds more closely and to improve reporting and disclosure practices.

The first years of this new century have seen public plans move into underfunded status at a time when states have been under substantial fiscal pressure, leading to disptues over plan funding. Also, in the post Sarbanes-Oxley environment, public funds have stepped up their corporate governance activities.