Annual Required Contribution (ARC)

The actuarially calculated amount, either in dollars or a percent of salary, that is required to be paid each year to help keep a pension plan fully funded.

*ARC calculations are no longer mandatory, but many plans have continued to use them. Though ARC has been a useful tool when comparing plans, sponsors have a lot of latitude in the assumptions and methods to calculate the ARC. In addition, many plans have no requirement to pay the full ARC. The Governmental Accounting Standards Board rules now require reporting of the Actuarially Determined Employer Contribution (ADEC), but only in a supplemental section of the plan’s annual report, along with a new requirement to report on the contribution amount actually paid. ^[1] [2]

Cash Balance Plan

A plan designed to provide an employee with an accumulated account balance upon retirement which the employee uses to fund his/her retirement. Employee and employer contributions are typically fixed percentages of salary. Investment gains add to the account balance and investment losses are protected by the employer’s guarantee of a minimum investment return. ^{[3] [4]}

Cost of Living Adjustments (COLA’S)

Annual increases made to pension benefits to counteract the effects of inflation. Adjustments can be fixed increases or tied to the consumer price index (CPI). ^[5]

Defined Benefit (DB) Plan

A plan designed to provide the employee with a specified amount of monthly retirement income typically based on the employee’s salary, years of work, and age. ^{[6] [7]}

Defined Contribution (DC) Plan

A plan designed to provide an employee with an accumulated account balance upon retirement which the employee uses to fund his/her retirement. Employee and employer contributions are typically fixed percentages of salary and investment returns (gains and losses) largely effect the account balance. ^[8]

Hybrid Plan

A plan that combines elements of a defined benefit and a defined contribution plans. There are two main types of hybrid plans; side-by-side and stacked. In a side-by-side the DB and DC portions are funded and accumulate independently but simultaneously. In a stacked plan earnings below a certain level are covered by a DB plan and earnings above that level are covered by a DC plan. ^[9]

Pension Spiking

Practice of adding benefits such as saved vacation and sick pay to boost an employee’s final compensation for pension calculations leading to higher pension benefits. This can be done by converting saved sick and vacation pay to boost salary or crediting that unused time to artificially extend the length of service. ^[10]

Unfunded Actuarial Accrued Liability (UAAL)

The UAAL is an actuarial term that refers to the difference between the actuarial values of assets owned by the plan and the total benefits due to be paid. Unfunded liabilities are created when the actual plan investment returns are less than the assumed returns, and when other plan assumptions (such as years spent in retirement, larger than expected salary increases, retroactive salary increases, and pension spiking) are realized, resulting in actual costs exceeding predicted costs. Most plans amortize the unfunded amount over a set period of years, increasing the annual cost of the plan during those years, and those additional costs are typically assigned solely to the employer.

Crowding Out

When the growth in costs of one program reduces the ability of the government to invest in another program. For example, when the growth in pension costs exceed the growth in revenues, a state or local government might be forced to reduce spending on programs such as infrastructure or education.

Double-Dipping

When a retired public employee who is currently receiving pension benefits resumes working (often for the same government agency) and receives both a pension and salary at the same time.

The Employee Retirement Security Income Security Act of 1974 (ERISA)

A federal law that sets minimum standards for most voluntarily established pension and health plans in private industry to provide protection for individuals in these plans.

Generally Accepted Accounting Principles (GAAP)

The common set of accounting principles, standards and procedures that accountants use to prepare financial statements.

The Governmental Accounting Standards Board (GASB)

An independent organization that establishes and improves standards of accounting and financial reporting for U.S. state and local government.

Vesting Period

The amount of working time an employee must wait before securing rights to pension benefits.

Citations

[1] “The State Pensions Funding Gap: Challenges Persist.” The State Pensions Funding Gap: Challenges Persist. The Pew Charitable Trusts, 14 July 2105. Web. 29 Sept. 2015.

[2] Zorn, P. (2013, October 1). Comparing Public Pension Accounting and Funding Measures. Retrieved October 14, 2015, from http://www.gabrielroeder.com/wp-content/uploads/2013/12/GRS-Insight-October-2013-Final-Revised.pdf

[3] “Cash Balance Pension Plan Definition | Investopedia.” Investopedia. Investopedia, LLC, 18 Nov. 2003. Web. 23 Sept. 2015.

[4] Christensen, Lance, and Adrian T. Moore. Pension Reform Handbook: A Starter Guide for Reformers. Los Angeles, CA: Reason Foundation, 2014. Reason Foundation, July 2014. Web. Aug.-Sept. 2015. <http://reason.org/files/pension_reform_handbook.pdf>.

[5] “Hybrid Public Pension Plans: A Primer.” Pew Charitable Trusts, Apr. 2015. Web. 23 Sept. 2015. <http://www.pewtrusts.org/~/media/assets/2015/04/hybrid-public-pension-plans_brief.pdf?la=en>.

[6] “Hybrid Public Pension Plans: A Primer.” Pew Charitable Trusts, Apr. 2015. Web. 23 Sept. 2015. <http://www.pewtrusts.org/~/media/assets/2015/04/hybrid-public-pension-plans_brief.pdf?la=en>.

[7] Christensen, Lance, and Adrian T. Moore. Pension Reform Handbook: A Starter Guide for Reformers. Los Angeles, CA: Reason Foundation, 2014. Reason Foundation, July 2014. Web. Aug.-Sept. 2015. <http://reason.org/files/pension_reform_handbook.pdf>.

[8] Ibid

[9] “Hybrid Public Pension Plans: A Primer.” Pew Charitable Trusts, Apr. 2015. Web. 23 Sept. 2015. <http://www.pewtrusts.org/~/media/assets/2015/04/hybrid-public-pension-plans_brief.pdf?la=en>.

[10] “Pension Spiking – Ballotpedia.” Pension Spiking – Ballotpedia. Ballotpedia. Web. 23 Sept. 2015.

• American Academy of Actuaries
• Ballotpedia, Pension Policy
• The Brookings Institution, Retirement, Saving, and Pensions
• Center for State and Local Government Excellence
• Manhattan Institute for Policy Research
• The National Association of State Retirement Administrators
• Pension Litigation Tracker, Laura and John Arnold Foundation
• The Pew Charitable Trusts, Public Sector Retirement Systems
• Public Plans Data
• Reason Foundation
• Reason-Rupe Poll on Public Support for Pension Reform
• Stanford Institute for Economic Policy Research Pension Tracker
• State Budget Crisis Task Force
• State Data Lab by Truth in Accounting
• U.S. Census Bureau, Annual Survey of Public Pensions: State- and Locally-Administered Defined Benefit Plans, Historical Data
• Urban Institute, Program on Retirement Policy

• The 80% Pension Funding Standard Myth, American Academy of Actuaries
• Hybrid Public Pension Plans: A Primer, The Pew Charitable Trusts
• Investment-Based Transition Costs of Closing a Public Defined Benefit Pension Plan, Mercatus Center
• Keeping the Promise: State Solutions for Government Pension Reform, American Legislative Exchange Council
• The Limits of Retrenchment: The Politics of Pension Reform, Manhattan Institute for Policy Research
• Pension Reform Handbook: A Starter Guide for Reformers, Reason Foundation
• Pensions in Cyberspace, Wells Fargo
• Public Pension Plan Reform: The Legal Framework, University of Minnesota
• The State of State Pension Plans 2013: A Deep Dive Into Shortfalls and Surpluses, Morningstar
• Success Strategies for Well-Funded Pension Plans, Center for State and Local Government Excellence