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Martin School of Public Policy and Administration

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Executive Summary

Each of the fifty states oversees at least one public retirement system for employees. This study examines which factors affect the funded ratio of these systems. The intent of this paper is not to solve the problems facing public retirement systems, but to give decision makers and policy leaders a better understanding of what affects the funding levels of these systems. Understanding the various factors that affect the funded ratio will help decision makers determine which changes should be made to public retirement systems.

The funded ratio is one of the main methods used to determine how well funded these systems are and indicates an ability to pay accruing liabilities (Boston College Public Plans Database). It is defined as actuarial assets divided by actuarial liabilities. Existing literature suggests that investment returns and a consistent lack of employer contributions have driven down the funded ratio of states' public retirement systems. This paper examines these factors, but also looks at the effects of Social Security eligibility, cost of living adjustments, type of retirement plan offered, payroll, number of members, and employee contributions.

To determine the effect of these variables on the funded ratio, I created a dataset of state-run public retirement systems from 2001 to 2009. This data was obtained from the Public Plans Database, a product of the Center for Retirement Research at Boston College. A model was created and a linear regression estimated the effects of the various factors. The linear regression model found six significant explanatory variables: plan type, actuarial assets, annual required contributions (ARC), payroll, the employee contribution rate, and employer contributions. All of the explanatory variables were found to be significant at the 99% confidence interval with the exception of employer contributions. Employer contributions were found to be significant at the 90% confidence interval.

Based on the regression results, I recommend states pay toward the existing ARC. Since this impacts the funded ratio, existing statutes prohibiting a certain contribution level or simple failure to make payments, will probably increase the amount that states must pay in the future. Reducing the ARC will lower the system’s actuarial liabilities relative to assets and potentially make future ARC payments lower.

Actuarial assets also have a statistically significant impact on the funded ratio in my analysis. Though it is outside the scope of this study to make recommendations regarding specific retirement systems, my analysis indicates that increasing assets relative to liabilities will raise the funded ratio. My results indicate that this could be done through increased employer contributions, a reduction in payroll, and lowering the ARC.

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