Rising Pension Liabilities

February 1, 2017, Department, by Kevin Roth, Ph.D.

2017 February Research 410

On page 34 of this issue is an article about defined benefit (DB) plans offered to most local government employees, including those working for park and recreation agencies. DB pension plans are essential components of park and recreation professionals’ compensation and retirement benefits. More than nine in 10 full-time local and state government employees have access to a defined benefit from their employer, and, in many cases, this is their sole source of retirement savings.

At the same time, the commitments tied to these plans are, in many cases, putting extreme financial pressures on their sponsors. The size of the local and state governments’ pension liabilities varies widely because of differing assumptions and the dynamic nature of financial markets. The Federal Reserve estimates that local and state governments’ DB plan liabilities totaled $5.697 trillion at the end of the third quarter of 2016. This represented an 8.8 percent increase in just the past two years.

There are many public DB plans that are in good shape, being either nearly or fully funded. But this is not true for all plans. In fact, on average, these plans are a third underfunded. According to the Federal Reserve, unfunded DB pension liabilities of local and state governments totaled $1.879 trillion at the end of the third quarter of 2016, after having grown 25 percent over the past two years. Regardless of the health of their DB plan, local and state governments are paying closer attention to the obligations they made to their current and retired employees.

The Cost of Servicing Public Debt
Pensions are not the only financial pressure weighing on local government finances. In many cases, blossoming obligations tied to healthcare for current employee and retirees are diverting funds away from day-to-day operations. Another source of financial pressure is the growth in local and state government debt.

Consider this: Between 1994 and 2014, outstanding debt for local governments in the United States grew from $663.66 billion to $1.83 trillion. That represents a gain of 175 percent over the 20-year period, or an annualized growth rate of 4.0 percent.

While the debt itself is not necessarily a problem, the growing amount of money needed to service that debt can be. In 1994, local governments spent a combined $31.24 billion to make interest payments on their outstanding debt obligations. By 2014, debt service payments had nearly doubled to $61.93 billion. It is worth noting that the cost of servicing public debt has been kept in relative check because interest rates in recent years have been at historic lows thanks to Federal Reserve monetary policy and economic instability outside of the United States. Yet, the low-interest-rate environment is not likely to last forever.

The growing percentage of local government budgets dedicated to servicing debt, pension liabilities and healthcare obligations reduces the discretionary budgeting abilities of policymakers. In other words, there is a smaller proportion of the budget that is now available to support the vast services provided by local governments, whether it be for public safety, education, transportation or parks and recreation.

Impact on Park and Recreation Operations Spending
Per the U.S. Census Bureau, operations spending at local park and recreation agencies grew 134.4 percent to $32.5 billion from 1994 to 2014. This translates to a 4.4 percent annualized growth rate that well outpaces the rate of inflation experienced over the same 20-year period. But a closer look at the data is not as sanguine.

When we shrink the time horizon to just 10 years (2004 - 2014), local park and recreation agency operations spending grew at a slower 2.3 percent annualized rate. To make matters worse, operations spending contracted 10.0 percent between 2009 and 2014 or at an annualized rate of -1.9 percent. To provide some context, inflation increased 12.7 percent over the same five years.

The implications of this are clear: the growing financial obligations of local and state government have led to reduced spending for discretionary parts of the budget. This change is not cyclical in nature, caused by changing economic conditions, but rather a structural shift that will permanently affect park and recreation funding.

In this environment, it is more imperative than ever to share your agency’s park and recreation story with the community to protect and even grow its budget. As demonstrated in the Americans’ Engagement with Parks survey and other NRPA reports, the strong support Americans have for parks and recreation is an important piece of this story. These data and insights help tell your agency’s story and show that what you provide to your community is not a luxury. Rather, parks and recreation is a vital resource that improves the lives of those who live in our communities.

A few key points from the Engagement survey that are worth having in your arsenal include:

  • Americans on average visit their local park and recreation facilities approximately 29 times a year.
  • Three in four Americans agree that the NRPA Three Pillars of Conservation, Health and Wellness, and Social Equity represent what they see as the priorities for their local park and recreation agency.
  • Nine in 10 Americans agree that parks and recreation are important services delivered by their local government, nearly matching the percentages of survey respondents who had said the same for public safety, education and transportation.
  • Americans are more likely to vote for local politicians who make park and recreation funding a priority. Furthermore, three-quarters of Americans support increased local government spending for park and recreation agencies.

It is also critical to tell key stakeholders in your community that local park and recreation agencies are engines of economic activity. According to our Economic Impact of Local Parks study, local and regional park and recreation agencies were responsible for $140 billion in economic activity and nearly 1 million jobs simply from their operations and capital spending.

But, beyond the impact of rising pension liabilities and other financial obligations, it is imperative to better understand the role that employee compensation, including retirement benefits, plays in recruiting and retaining top park and recreation employees. Whether it be a defined benefit plan, a defined contribution plan or a combination of both, providing solid retirement benefits to park and recreation professionals is a “must have” in any compensation offering.

To that end, NRPA will be launching a new research project in 2017: the NRPA Salary Survey. This survey will not only collect data on base salaries for a variety of park and recreation agency jobs, but will also explore what are the other key components of agency compensation offerings. This will include healthcare, paid time off, disability and life insurance, and retirement. We hope to learn what the best practices in recruiting and retaining park and recreation employees are as agencies strive to serve their communities.

Kevin Roth, Ph.D.,  is NRPA’s Vice President of Research and IT.