Addressing Factual Inaccuracies in NPPC’s Blog Post on State of Pensions 2020

Equable Institute recently published a report on the State of Pensions in 2020, reviewing the recent two decades of funding history for statewide retirement systems and projecting the effects of COVID-19 on state pension funds. The report’s have been widely cited in publications ranging from the Financial Times to Sacramento Bee. Among the comments on the report was a blog post from the National Public Pension Coalition (NPPC), which misrepresented the paper’s findings. Below, we address their claims.

Claim: State of Pensions 2020 “falsely claims that public pensions were in a worse financial shape heading into the current economic crisis than they were following the Great Recession in 2008.”

Reality: This claim is false.

NPPC’s post incorrectly says our report “falsely claims that public pensions were in a worse financial shape heading into the current economic crisis than they were following the Great Recession in 2008.”

However, the first chart in our report actually shows that in 2019 state pensions are better funded than in 2009, following the Great Recession. It is unclear how NPPC made this mistake. The point of the chart was to highlight that in the period before the COVID-19 Recession hit (i.e. in 2019) state pension funded ratios at 72.6% were worse off than before the Great Recession (i.e. in 2007) when they were 93% funded. The data shown are reported by the states (and retirement systems) themselves. Here is the chart:

Claim: State of Pensions 2020 does not address public pension debt relative to Gross Domestic Product (GDP).

Reality: This claim is false.

The NPPC blog writer says our report “conveniently ignores a small but highly important fact, which is debt in relation to the Gross Domestic Product (GDP).”

However, our report contains multiple charts on this topic and an entire page talking about it. We think NPPC only read the press release and didn’t look at the report itself. The third chart in our analysis shows pension debt compared to GDP. A later slide shows this trend over the past several decades, using data from the Federal Reserve. We also discuss this issue on analysis slides.

Claim: State of Pensions 2020 wrongly claims that funded ratios will decrease in 2020.

Reality: This mistaken claim is based on a misunderstanding of pension finances.

NPPC’s post argues that because the S&P has bounced back from its losses during the pandemic, that this means our findings that funded ratios are going to dip in 2020 is “incorrect.” This interpretation is mistaken.

First, pension funds aren’t trying to earn investment returns above 0%, they are trying to match an assumed rate of return that is much higher. At the end of 2019, the average investment target was 7.2%. So even though financial markets recovered from their dip, what they would need to avoid a decline in funded ratio for 2020 (using a fair market value of their assets) is investment returns to rebound high enough to earn strong investment returns that meet or exceed their assumptions — and very few pension plans as of June 30, 2020 were projected to do so.

Second, most pension funds measure their fiscal year as of June 30. Our analysis of funded ratios for the year 2020 takes that into account. Even if the investment returns for a pension fund like CalPERS were 10% during the period January 1 to December 31, they might still report a lower funded ratio for 2020 because they were targeting a 7% return for the time frame July 1, 2019 to June 30, 2020 and only earned around 3%.

Because financial markets during the summer and fall of 2020 have performed well, it is possible that many pension funds will report an increase in their funded status for the fiscal year 2021 that balances out poor performance in 2020. We have to wait to see how the entire fiscal year plays out and changes in the markets before we can say that with any confidence though.

Claim: State of Pensions 2020 overestimates the projected decline of funded ratios for 2020.

Reality: This misleading claim is based on comparisons that use a different type of asset measurement than State of Pensions 2020.

Finally, NPPC’s blog confuses two standard types of pension measurements: (1) assets measured using fair market values, and (2) assets measured using an “actuarially smoothed” accounting tools. The problem appears to be in how they’ve compared our findings to another quality research reports from two groups SLGE and CRR. NPPC points out that our projected funded ratio for 2020 based on investment returns as of June are “notably lower than more reputable, non-partisan research organizations like the aforementioned SLGE, which estimate that average funded ratios for states are projected to remain about the same as they were in the fiscal year 2019.” That’s true — because the two reports are measuring two related, but different things.

• The funded levels of state pension plans in our State of Pensions report are based on the “market” value of assets, which is whatever the assets could get in a fair sale today.
• The funded levels in the SLGE/CRR report use “actuarial” value of assets, which phases in investment gains and losses over time, typically only counting 1/5 of investment returns each year.

Both approaches have their own uses. Anyone who studies pensions knows the difference between the two. Actuarial values inherently phase in losses slower, so the 2020 funded ratio will look better because 4/5ths of any underperformance will be pushed out to the next few years. Market values inherently

Ultimately, the findings in our report are pretty much the same as SLGE/CRR. When we adjust our dataset to use “actuarial assets” we get similar numbers to SLGE, and when they shift to “market value” they get numbers closer to ours. We like the report that NPPC cites, agree it is reputable, and by their own logic our report coming to similar conclusions is reputable too.

Our intent with this post is to simply set the record straight. We reached out to NPPC with these observations about factual errors in their blog post once it was published, but they did not issue a correction to their content. It is a shame, because there are public workers who are relying on them for quality information about the important need to improve public pension funding today, for whom these findings have real-world implications that go beyond ideology.

The ultimate confusion appears to rest with the idea that because our report findings illuminate challenges facing state pensions that must mean we are attacking them. But this is not the case at all. Here is what we wrote on the first page of our report:

“The problems facing states are not an inherent result of offering pensions in the first place; the problems stem from a political apathy toward the steadily growing rate of unfunded liabilities and the costs they produce.”

We believe that public sector retirees should feel confident that their state is going to keep all promises made. We also believe that without inflation adjustment (like COLAs) pension benefits can be undermined by gradually increasing prices.

We believe that all public workers should have access to adequate retirement security. That starts with well funded pension plans. Today’s state pension funds are, on average, not well funded. They have a $1.35 trillion shortfall in necessary money — and that’s before counting the pandemic. This shortfall has led states to increase contribution rates from active teachers, firefighters, and municipal employees‚ which is effectively a pay cut. This shortfall has led states to slash benefits offered to future workers and reduce inflation adjustment.

Anyone concerned with the longevity of pensions for public employees, as we are, should be concerned with the funded level of state retirement systems.