WASHINGTON -- About 3% of all state and local government spending is used to fund public pension benefits, a small increase from previous reports, the National Association of State Retirement Administrators said.
A NASRA study found that total spending on public pension systems increased to 3.1% in 2010, the latest year which data was available, from 2.9% the previous year.
“On average, retirement programs remain a small part of state and local government spending, although required costs, benefit levels, funding levels, and funding adequacy vary widely,” the report concluded. “Over $210 billion is distributed annually from these trusts to retirees and their beneficiaries, which serves as a source of economic stimulus to virtually every city and town in the nation.”
Since the economic downturn, states and cities have taken steps to improve the financial conditions of their retirement plans to reduce costs. Most of those changes have included adjusting employer and employee contribution levels, restructuring benefits or both. “Adjustments to pension plan costs have been proportionate to the plan’s funding condition and and the degree of change needed,” the report said.
New York had the highest spending level on public pensions with 4.98%, followed by Illinois with 4.87% and West Virginia with 4.63%. New Jersey spent the least on public pension systems with 1.1%, followed by North Carolina and Vermont, which both spent 1.36%.
Most of the variation in pension spending levels can be attributed to three primary factors: different levels of effort by states and cities to make pension contributions; differences in benefit levels; and variations in the size of unfunded pension liabilities, the report said. Pension costs in cities are about 50% higher than in states due in part to the types of services delivered at the local level and the larger share of municipal budgets that is committed to salaries.
Public pensions are financed through a combination of contributions from public employers, public employees, and the investment returns on those contributions. Since 1982, investment returns have accounted for approximately 60% of all public pension revenue, employer contributions for 28% and employee contributions 12%. However, in recent years many states have increased required employee contributions. In 2009, employee contributions accounted for 31% of all public pension plan contributions with employers putting in the remaining 69%.