Von M. Hughes - U.S. Public Pension Handbook

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Id like to thank my wife Carmen for her patient support throughout the writing process, but even more so for her confident, persistent encouragement over the last few years that I had the ability and drive to make this book a reality. Id also like to thank both Christina Esquer and Justin Glen for their diligent help in collecting research and processing the volume of data that ultimately went into these pages. And, finally, Id like to thank my kids, Stewart, Gabrielle, and Alexa, whose enthusiastic and proud statements to others that my dad is going to publish a book! was all the motivation that I truly needed.

FOR OVER 16 million public employees in this country, retirement income provided by public pension systems represents the core component of their long-term retirement security. It is commonly said that retirement security sits on the stable, three-legged stool of personal savings, Social Security, and pension benefits. However, state and local government pensions in our country, an important leg of this stool, face very real challenges to their long-term sustainability. And the challenges to organizational sustainability are faced at various levels within the public pension ecosystem.

Public pensions face the demographic challenges of an aging population and an increasingly mobile workforce, and the pressure on pension designs caused by these demographic shifts. Higher life expectancy, driven by improvements in medical and public health knowledge, continue to increase long-term pension liabilities and current obligations. The defined benefit model has provided, and continues to provide, pension security for the overwhelming majority of public employees in this country. The defined benefit design has weathered and survived global wars, the Great Depression, and various recessions over the last century. The persistence of the defined benefit model itself speaks volumes to its effectiveness as a design and as a core component of retirement security in this country.

However, public pensions continue to face funding challenges. Increasing reliance on volatile market returns to meet or exceed actuarial assumptions or targets that may or may not meet long-term expectations or liabilities puts pressure on public pension trustees and investment staffs. Pension design does matter. And pension reform has highlighted a number of alternatives to the defined benefit model, including defined contribution, hybrid, and other pension designs. Yet the most common and impactful public pension design shifts continue to be not away from the defined benefit model but toward an adjusted defined benefit model. For example, public pension trustees have responded by lowering long-term pension costs by increasing the age or vesting requirement for benefit eligibility, or even increasing the number of years used to calculate final average salary in the defined benefit formula. More dramatic pension design shifts to fully defined contribution (or even meaningful hybrid) models are far less common across the public pension landscape than modifications to the durable, persistent defined benefit model. However, thoughtful public pension trustees should continue to explore and discuss innovative approaches to reducing pension costs.

Public pension trustees also face challenges to organizational sustainability in the marketplace for investment talent. As public pension portfolios become more complex and the investment approaches employed become more sophisticated, state and local pensions feel the heat of competitive pressure from the private sector to hire and retain qualified investment professionals. The need for qualified investment professionals with specialized investment expertise has only become more pressing as current public pension governance encourages and often requires effective delegation to staff. Moreover, the burden on investment staff has increased as well. Public pension staff is commonly asked to shoulder increasing workloads, as public pension internal resources often do not match what is needed to meet established public pension portfolio goals. Trustees must be vigilant to prevent this mismatch, by either increasing internal staff in a competitive marketplace for investment talent or by simplifying portfolio goals to match resource and investment talent constraints.