Obviously, managing public pensions is major governmental undertaking.
Success or failure in pension management has direct bearing on the well- being of governments, taxpayers, and public employees and retirees.
Pension systems are responsible for the investment of trillions of dollars in plan assets and for the disbursement of hundreds of billions of dollars in pension benefits annually. Savvy pension administrators, who are able to produce high rates of investment return commensurate with an acceptable amount of risk, can potentially minimize costs to taxpayers and future generations for government’s pension commitments. Strong pension fund health also helps to assure the commitment and productivity of current employees and can serve as an important enticement in government’s strategic efforts to acquire needed human resources.
In contrast, government decisions to underfund pension plans can have serious consequences. As mentioned above, the city of San Diego, California’s unfunded pension liability, which was in excess of $1 billion in 2004, resulted in a downgrade of the city’s bond rating by a major bond rating firm. Similar consequences may also obtain for pension systems that make unwise or overly risky investments with pension assets or that use poor assumptions to design flawed retirement plans (e.g., the Houston and Milwaukee DROPs plans mentioned above). As Mahoney (2002) points out, lowered bond ratings increase government’s borrowing costs, thus increasing the costs borne by future taxpayers, not only for unfunded pension obligations but also for other government borrowing as well.
Finally, it is important to mention new realities which only accentuate the challenges faced by pension systems. Pension plans have long attended to concerns over plan continuity in the event of a natural disaster (e.g., floods, earthquakes, etc.). Now, in the post-9/11 world, pension systems are in the position of needing to develop and adopt strategies that will ensure the continuity of operations in the event of terrorist acti- vity or other attempts to intentionally interrupt governmental operations.
The Louisiana State Employees’ Retirement System (LASERS), for example, recently developed a disaster recovery and business continuity plan.
As reported by Hegdal (2003, 6), LASERS’ plan suggests the importance of identifying internal and external system risks, prioritizing critical busi- ness processes and recovery times, identifying the assets that need to be protected in the event of a disaster, conducting vulnerability assessments (e.g., How will a disaster in one pension system division affect other divisions?), and developing a business continuity plan for each pension system unit.
As this suggests, new workaday realities have direct implications for the effective management of public pensions. Along with the scale and scope of public pensions, shifting demographic trends, and unpredictable political and economic forces, these challenges underscore the importance of effective pension management to government’s overall financial manage- ment performance. Given this, there is some comfort in knowing that pension fund management has become more professional over the last 10 to 15 years (Walters, 2000). This augers well for the future of both public pension and financial management.
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Chapter 17
An Econometric
Assessment of State
and Local Government Retirement System
Governance Practices, Investment Strategies, and Financial
Performance
WILLIAM G. ALBRECHT, Ph.D.
Department of Political Science and Public Administration, University of North Carolina, Pembroke