Projecting State & Local Government Retirement Costs version 3 BEA Government Statistics Users Conference September

1. Projecting State & Local Government Retirement Costsversion 3BEA Government Statistics Users ConferenceSeptember 14, 2006 Richard Krashevski, GAO and Jeremy Schwartz, GAO and GWU The authors are solely responsible for this presentation and the estimates should not be attributed to the U.S. Government Accountability Office.

2. Purpose of the Projections: • Part of GAO effort to assess fiscal outlook of federal, state and local governments • Since 1992 GAO has published long-term fiscal simulations of federal deficits & debt • Recent effort to include state & local sector in long-term fiscal outlook analysis • Pension costs are a key part of this effort

3. Steps used to find the government’s required pension contribution: Steps: Project employment Project wages Project the growth in the number of beneficiaries Project the growth in real benefits per beneficiary Project employee contributions as a constant % of future wages Determine the government’s contribution rate as the the PV of future liabilities minus the sum of the PV of employee contributions and 2005 assets, all divided by the PV of future wages

4. Pension Model Variables • eglsall: state and local employees (NIPA). Grows with population (np) • np: U.S. Population. Grows at OASDI Trustees’ assumed rates = declining gradually from 0.8%/yr to a steady 0.3%/yr beginning in 2043. • jecistlcr: real employment cost index for state and local government employees (BLS). Growth equals difference between CBO eci and cpiu growth assumptions (3.3% - 2.2% = 1.1%) • cpiu: consumer price index (BLS). Grows at CBO’s assumed rate = 2.2%. • gslcwageallr: aggregate real wages paid to state and local workers (NIPA). Grows with real employment cost index (jecistlcr) and population (np). • beneficiaries: state and local pension benefit recipients (Census). Growth determined by lagged employment growth. • deathrate: assumed percentage of retirees that are deceased in the current year. Based on SSA terminated beneficiaries = 3.67% of beneficiaries. • penbenr: real aggregate pension payments made to state and local pension beneficiaries (NIPA). Depends on projected beneficiaries and real benefit per beneficiary. • eeconpenr: real aggregate pension contributions by state and local employees (NIPA) = 4.7% of wages & salaries. • rpenreal: real return on pension assets (GAO Analysis). Average real return on Flow of Funds retirement fund asset categories from 1965-2005 times their average share of assets over the last ten years = 5.0%. • contributionrate: state and local government pension contributions as a percentage of state and local aggregate wages (GAO Analysis).

5. Pension Model Equations

6. Lagged Employment Growth Weights Determine Beneficiary Growth

7. Forecast and Actual State and Local and Social Security Retirees

8. Composition of Pension Fund Assets: Shift to Equities

9. Historic Contribution Rate and Return on Pension Assets Real return averages -0.3% from 1977 - 1980. The contribution rate rises from 10.5% to 11.7% from 1978 to 1983. Real return averages 16.4% from 1996 - 1999. The contribution rate falls from 8.9% to 6.3% from 1997 to 2001.

10. Contribution Rate: Sensitivity to Real Return on Assets

11. Contribution Rate: Sensitivity to Pension Assets (1%)

12. Contribution Rate: Sensitivity to Pension Assets (1 standard dev.)

13. Contribution Rate: Ten Year Delay to Adjustment