District Pensions:

Federal Options for Sharing Burden to Finance Unfunded Liability

HEHS-95-40: Published: Dec 28, 1994. Publicly Released: Jan 12, 1995.

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Pursuant to a congressional request, GAO reviewed the District of Columbia's pension plans for certain employees, focusing on: (1) the history and status of the plans' unfunded pension liability and the number of plan participants prior to Home Rule; (2) a comparison of the plans' unfunded liability with other state and local plans; and (3) the District's funding formula under the proposed legislation and alternative federal funding methods.

GAO found that: (1) the District's pension plans were originally funded on a pay-as-you-go basis with no accrual of monies for future liabilities; (2) even when the plans were put on an actuarial basis, the District's contributions to the pension funds were lower than needed to eliminate the unfunded liabilities; (3) the District's pension plans are not as well funded as some comparable state and local plans; (4) the proposed legislation would eliminate the plans' unfunded liability in 2035 by increasing federal payments, decreasing benefits and cost-of-living adjustments, and placing the District's contributions on an actuarial basis; (5) under the proposed funding method, the federal government would assume about $1 billion of the District's obligations, most of which would be paid in future budget years because of the 5-percent annual increase in the federal payments; (6) the District's contributions for the first 3 years would be at the required minimum and would be higher than the actuarially determined amounts; (7) a constant federal payment of about $102.1 million would shift less of the contribution burden to future federal budgets and taxpayers and would help eliminate the unfunded liability; and (8) options to lower annual federal payments would eliminate the unfunded liability but increase the District's contributions.

Matter for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: Action on the recommendation has been awaiting completion of congressional actions to address the District's financial crisis. These congressional actions were incorporated as a part of Public Law 105-33 (The Balanced Budget Act of 1997) in Title XI. The relevant sections of Title XI are chapter 1, section 11002(b)(1-4), and chapter 2, section 11011(a and b). These sections "relieve the District of Columbia government of the responsibility for the unfunded pension liabilities transferred to it by the Federal government" and obligate the federal government to "make Federal benefit payments associated with the pension plans for police officers, firefighters, and teachers of the District of Columbia."

    Matter: If Congress wishes to change the law to increase federal payments to the three District pension plans, it should consider authorizing a constant annual payment rather than the escalating payments provided for in H.R. 3728. A constant annual approach would be more equitable because it would avoid shifting to future taxpayers a disproportionate share of the burden of financing the three plans. In addition, if Congress concludes that the federal share should be increased in total by the amount authorized in H.R. 3728--calculated at about $1.1 billion in value today--the appropriate constant annual federal payment would be $102.1 million.

 

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