ALEC Statement of Principles on Sound Pension Practices

Summary

Retirees, taxpayers and workers expect the state government to wisely steward pension investments. Therefore, the state government is responsible for making the best possible investments to fully fund future pension benefits. In order for state governments to keep their pension promises, policy principles are essential. The fundamental principles presented here provide guidance for a responsible, accountable, and transparent government pension system.

ALEC Statement of Principles on Sound Pension Practices

  • Stability – Government pensions should be secure and safe from high risk assumptions. State and local governments should eliminate incentives to underfund pension commitments, or to over-expend benefits beyond available revenues.
  • Predictability – The pension obligations of states should be predictable and structured to foster certainty for taxpayers and policymakers. Contribution levels should be stable. Benefits of government pensions should be comparable to plans available by private citizens, and the costs and benefits should be sustainable.
  • Adequacy – An unrealistically high assumed rate of return is a guaranteed way to underfund the government pension systems. State legislatures should fund 100 percent of Annually Required Contributions (ARC). Government pension systems should use assumptions that are consistent with Governmental Accounting Standards Board (GASB) and/or Generally Accepted Accounting Principles (GAAP) standards.
  • Affordability – Government pension plans should be properly structured within affordable employee contributions and government financial support of their core functions, without imposing an undue burden on taxpayers.
  • Transparency – Government pension systems should be transparent, open and non-political. Comprehensive Annual Financial Reports (CAFR) should be reasonably simple to understand and published in a timely manner.
  • Responsibility – Risks should be balanced equitably among employees, government and taxpayers. Lawmakers and fund managers should be accountable for the adequacy and solvency of retirement funds.
  • Ownership – Pension plans should ultimately benefit, reward, and compensate the work of government employees. Employees should share in the benefits, risks, and decisions of their retirement plans and their money, while protecting against potentially risky or ill-informed individual decisions.
  • Choice – Employees should be able to choose defined contribution investment plans to help balance risk and gain within individual investment needs and strategies.
  • Transportability – Government pension plans should move with employees throughout their careers, without locking employees into government jobs or penalizing those who chose to move in or out of the public sector.
  • Liquidity – Government pension plans should consider adequate liquidity to allow employees to use or sell some of their assets, especially during personal or family emergencies.
  • Safety – Legislators and other appropriate government organizations should have sufficient oversight and protections to protect employees against security risks to pension plans, including waste, fraud, and abuse, and crimes such as embezzlement, identity theft, and cyber theft.

 

Adopted by the Task Force on Tax and Fiscal Policy at the Annual Meeting, July 28, 2016.

Approved by the ALEC Board of Directors, September 12, 2016.