State and Local Plans for Public Employees—Are They Protected?

An advisor asked: I know private-sector qualified plans are protected under federal law (ERISA) but state and local plans for public employees are not. Are there any protections for state plans?

Highlights of the Discussion There is no comprehensive federal law that protects state and local governmental plans for public employees, and the Pension Benefit Guaranty Corporation (PBGC) does not insure such plans. That said, all 50 states have some form of protection for public pensions. The National Conference on Public Employee Retirement Systems (NCPERS) has a state-by state rundown of coverage. According to the U.S. Census Bureau, over 5,000 public sector retirement systems exist in the U.S.

The creation of public plans and the rules that govern them emanate from the entity that has “authority” over the pension, which could be the state constitution, the legislature, case law or a combination thereof. These rules vary significantly by state not only with respect to the source of protection, but who is entitled to protection and the plan features that are protected.

Public plans also are subject to state laws governing open meetings and open records rules, anti-conflict of interest rules, codes of ethics, the investment of trust assets, and common-law trust provisions. Further, the Governmental Accounting Standards Board (GASB) has some say in the operation of public pensions. GASB is an independent, nonprofit organization that sets financial accounting and reporting standards for state and local governments. GASB is the source of generally accepted accounting principles (GAAP) used by state and local governments in the United States. While GASB has no enforcement authority, public employee pension plans typically follow GASB rules in order to obtain unmodified opinions from their auditors (e.g., Statements 67, 68 and 75). Adhering to GASB standards is also an important consideration for the bond rating agencies.

There are also nonprofit organizations that work for the protection of public pensions, such as NCPERS, The National Public Pension Coalition, the National Association of State Retirement Administrators, as well as others.

Conclusion While federal involvement is limited, all 50 states have some form of protection for their public pensions. Significant differences exist among the plans. Working with these plans requires expertise in both pension law and investment theories.

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