Two states had more than $200 billion in public pension debt: California ($265 billion in unfunded pension liabilities) and Illinois ($201 billion).

Two other states reported more than $90 billion in unfunded pension liabilities: Texas ($92.2 billion) and New Jersey ($92 billion).

Unfunded liabilities exceeded $60 billion in two additional states: Pennsylvania ($67 billion) and Ohio ($61 billion).

Fourteen states have more than $30 billion in unfunded liabilities, including Massachusetts ($44 billion), Florida ($44 billion), New York ($45 billion), Kentucky ($40 billion), Connecticut ($37 billion), Michigan ($36 billion), Georgia, ($33 billion), and Maryland ($31 billion).

Tennessee, Washington, and South Dakota are the only three states that did not report any aggregate unfunded pension liabilities at the end of 2024, according to Reason Foundation’s pension report.

With $15,804 in pension debt per person, Illinois has the highest unfunded pension liabilities per capita, according to the Reason Foundation report.

Connecticut has the second-most public pension debt per capita at $10,151.

Six other states have public pension debt exceeding $8,000 per person: Alaska ($9,990), Hawaii ($9,784), New Jersey ($9,688), Mississippi ($9,033), New Mexico ($8,641), and Kentucky ($8,626).

California and Massachusetts have more than $6,000 in pension debt per resident.

Thirty-five states have at least $2,000 in public pension debt per capita, and 45 have at least $1,000 per person.

In the aggregate, state and local pension plans had $1.48 trillion in debt. Reason Foundation finds that the median funded ratio of all U.S. public pension plans was 79% at the end of 2024. This means governments have 79 cents for every dollar of pension benefits already promised to public workers and retirees.

With its public pension systems just 52% funded, Illinois has the worst funded ratio in the nation.

The other states with funding below 60% are Kentucky (54%), New Jersey (55%), Mississippi (56%), and Connecticut (59.5%).

State with public pension systems with funded ratios below 70% are South Carolina (62%), Hawaii (63%), Rhode Island (65%), New Mexico (66%), Pennsylvania (66%), Massachusetts (66%), Vermont (67%), New Hampshire (69%), and Colorado (70%).

Just three states had fully funded public pension systems at the end of 2024: Tennessee (104% funded), Washington (102%), and South Dakota (100%) and another six states were over 90% funded.

For detailed information about public pension plans’ unfunded liabilities, asset allocation, contribution rates, stress testing, and more, please visit Reason Foundation’s full Annual Pension Solvency and Performance Report.

The report ranks public pension systems from best to worst across five core dimensions: funded status, investment performance, contribution rate adequacy, asset allocation risk, and probability of meeting assumed returns.

Reason Foundation extracted these values from publicly available audited financial reports. Despite a thorough review, data collection at this scale can lead to discrepancies. Please alert us if you identify any errors. Reason Foundation’s pension team provides tailored technical assistance and resources to address the specific needs of states, counties, and cities. So please don’t hesitate to contact us at pensionhelpdesk@reason.org.

The post Study: Illinois, Connecticut, Alaska, Hawaii, New Jersey and Mississippi have the most per capita pension debt appeared first on Reason Foundation.

Reason Foundation finds that 18 public pension plans now have over $20 billion in debt each, nine systems have more than $30 billion, and one, CalPERS, has over $100 billion in unfunded liabilities. At $166 billion in debt, the California Public Employees Retirement Fund, the largest public pension system in the country, had the most pension debt in the nation at the end of 2024, the most recent year with complete data available.

The next five public pension systems with the most unfunded liabilities are all teachers’ retirement plans: the Illinois Teachers Retirement System ($83 billion in unfunded liabilities), the Texas Teacher Retirement System ($63 billion), the Pennsylvania Public School Employees’ Retirement System ($43 billion), the New Jersey Teachers’ Pension and Annuity Fund ($41 billion), and the California State Teachers Retirement System ($40 billion).

The three other public pension systems with over $30 billion in unfunded liabilities are the Florida Retirement System ($39 billion), the New Jersey Public Employees Retirement System ($31 billion), and the Illinois State Employees Retirement System ($30 billion).

In the aggregate, the nation’s public pension systems reduced their unfunded liabilities from $1.62 trillion in 2023 to $1.48 trillion in 2024, a 9% decrease. But three public pension systems saw their debt grow by more than $1 billion in 2024. Unfunded liabilities grew by over $500 million in another five additional plans.

With a $1.54 billion increase in unfunded liabilities, the Maryland Teachers’ Retirement System saw the largest growth in public pension debt in the nation from 2023 to 2024. The system now has $14.56 billion in debt.

Unfunded liabilities also increased by over $1 billion in 2024 in the Massachusetts Teachers’ Retirement System ($1.17 billion increase in debt) and the Illinois Teachers’ Retirement System ($1.01 billion).

From 2023 to 2024, public pension debt increased by over $500 billion in another five plans: the Maryland State Employees’ Retirement System ($735 million increase in unfunded liabilities), the Alameda County Employees’ Retirement Association ($678 million), the Illinois State University Retirement System ($628 million), the New Mexico Public Employees Retirement Association ($601 million), and the Indiana Public Employees Retirement Fund ($502 million).

The 2024 fiscal year was strong for most investors and the stock market, but some public pension plans lagged behind. Failing to meet investment expectations increases public pension debt and taxpayers’ costs. The median investment return for public retirement systems in 2024 was 9.88%, according to Reason Foundation’s Annual Pension Solvency and Performance Report.

The Fire Fighters’ Relief and Retirement Fund of Austin, Texas, earned just a 4.7% return in 2024. It was the only pension system in the nation that earned less than a 5% return in 2024. The fund’s debt increased from $297.5 million to $349.5 million in 2024.

Five other public pension plans failed earn a 6% returns in 2024: the Kansas City Public School Retirement System (5.2%), the Educational Employees’ Supplementary Retirement System of Fairfax County (5.68%), Oregon Public Employees Retirement System(5.8%), Omaha City Employees Retirement System (5.92%), and the South Dakota Retirement System (5.98%).

At the other end of the spectrum, Reason Foundation finds that 11 public pension plans earned investment returns of over 15% in 2024, and five plans produced returns exceeding 20%.


The Miami General Employees and Sanitation Employees Plan earned a 24% return rate in 2024, the highest in the nation.

The Michigan Legislative Retirement System (23.94% return), the Alabama Judicial Retirement Fund (22.21%), the Alabama Employees’ Retirement System (ERS) (21.2%), and the Alabama Teachers’ Retirement System (21.1%) also produced returns of over 20% for 2024.

For detailed information about public pension plans’ unfunded liabilities, asset allocation, contribution rates, stress testing, and more, please visit Reason Foundation’s full Annual Pension Solvency and Performance Report.

The report ranks public pension systems from best to worst across five core dimensions: funded status, investment performance, contribution rate adequacy, asset allocation risk, and probability of meeting assumed returns.

These values were extracted from publicly available audited financial reports. Despite a thorough review, data collection at this scale can lead to discrepancies. Please alert us if you identify any errors. Reason Foundation’s pension team provides tailored technical assistance and resources to address the specific needs of states, counties, and cities. So please don’t hesitate to contact us at pensionhelpdesk@reason.org.

The post The public pension plans with the most debt, best and worst investment return rates appeared first on Reason Foundation.

State pension plans continue to carry the majority of the nation’s public pension debt, holding $1.29 trillion in unfunded liabilities, compared to local governments’ $187 billion in debt, Reason Foundation finds.

The median funded ratio of this report’s sample of pension plans stood at 78% at the end of 2024, a 3% increase from last year. This indicates that, while public pension funding has improved over the previous year, governments have still saved only 78 cents of every dollar needed to provide promised retirement benefits.

Reason Foundation’s stress tests also suggest that public pensions remain vulnerable to market downturns. A single economic recession could significantly increase their unfunded accrued liabilities, potentially raising the state and local total of public pension debt to as much as $2.74 trillion by 2026.

The Pension Solvency and Performance Report provides a comprehensive overview of the current and future status of state and local public pension funds. As the nation navigates another year marked by significant economic fluctuations and demographic shifts, this report assesses the resilience and adaptability of U.S. public pension systems. This analysis ranks, aggregates, and contrasts public pension plans based on their funding, investment outcomes, actuarial assumptions, and other indicators.

In addition to 24 years of historical data, the 2025 edition of Reason Foundation’s Pension Solvency and Performance Report includes financial and actuarial data from the pension plans’ 2024 fiscal year, the most recent year for which most government pension plans have reported data.

This edition of the report ranks public pension systems from best to worst across five core dimensions: funded status, investment performance, contribution rate adequacy, asset allocation risk, and probability of meeting assumed returns. Together, these measures reveal which states have positioned their public pension systems for long-term stability and which remain vulnerable to rising costs, market volatility, and political shortfalls in funding discipline.

Unfunded public pension liabilities

In recent decades, public pension systems in the U.S. have seen a significant increase in unfunded liabilities, particularly during the Great Recession. Between 2007 and 2010, unfunded public pension liabilities grew by over $1.15 trillion—an 809% increase—reflecting the financial challenges faced during that period. Despite some improvements in funding ratios over the last decade, these pension liabilities have continued to rise, underscoring ongoing financial pressures on state and local governments and taxpayers.

As of the end of the 2024 fiscal year for each public pension system, total unfunded public pension liabilities (UAL) reached $1.48 trillion, with state pension plans carrying the majority of the debt.

Nationwide, the median funded ratio of public pension plans stood at 78% at the end of 2024. Still, stress tests suggest that another economic downturn could significantly increase unfunded liabilities, potentially raising the total to $2.74 trillion by 2026.

Funded ratios of public pensions

The funded ratio of public pensions, which indicates the percentage of promised benefits that are currently funded, has experienced considerable fluctuations. After returning to 96% funded in 2007, the funded ratio of U.S. public pension systems fell to 64% during the Great Recession. Although funded ratios have recovered somewhat, they remain susceptible to market downturns.

A stress test scenario for 2026, assessing the impact of a 20% market downturn, indicates that the average funding level of public pension plans could fall to 63%. This could lead to critical underfunding for many pension plans, raising concerns about their ability to fulfill future obligations.

Changes in investment strategies

Over the past two decades, investment strategies of public pension funds have shifted notably. Allocations to traditional asset classes, like public equities and fixed income, have decreased while investments in alternative assets, such as private equity, real estate, and hedge funds, have increased. This shift reflects a strategic move for pension systems trying to achieve higher investment returns in a challenging market environment.

By the end of the 2024 fiscal year for each pension system, public pension funds managed approximately $5.49 trillion in assets, with a significant portion now invested in alternative assets, such as private equity/credit, and hedge funds. While these alternative investments may offer the potential for higher returns, they also introduce greater complexity and risk.

Investment performance

Public pension funds have faced challenges meeting their assumed rates of return (ARRs). Over the past 24 years, the national average annual rate of investment returns of pension systems has been 6.62%—still below what the plans had assumed. The average assumed rate of return for public pensions has been gradually reduced from 8.02% in 2001 to 6.87% in 2024.

Failing to meet their overly optimistic assumed rates of return has contributed to a significant increase in unfunded liabilities, requiring additional pension contributions from state and local governments, i.e., taxpayers, to maintain funding levels.

Investment returns themselves have varied widely, with public pension plans posting very strong gains in 2021 (25.4% returns), in contrast to large losses in 2009 (-12.9% returns on average) and further losses in 2022 (-5.1%). This volatility between expected rates of return and actual investment returns has created budgetary challenges for governments and taxpayers.

Employer contributions and cash flow

Employer contributions continue to dominate pension funding, while employee rates remain stable. In 2024, the total contribution rate was 28.8% of payroll, with employers covering 21.6% and debt amortization alone consuming 15.7%. More than half of all contributions—54%—went to paying down past pension debt rather than funding new benefits.

Net cash flows improved modestly, narrowing to -1.7% of assets, but systems remain reliant on strong investment returns to cover ongoing benefit payments.

Conclusion

Despite a year of substantial market gains and improved funding ratios, systemic risks remain for public pension systems. Far too many pension plans continue to rely on optimistic return assumptions, volatile markets, and a heavy reliance on taxpayer contributions to manage their legacy debt. Without sustained public pension reforms and more disciplined funding policies, today’s limited progress could quickly reverse.

This report was produced by Reason Foundation’s Pension Integrity Project, an initiative to conduct research and provide consulting and insight about the public pension challenges our nation grapples with.

Webinar

To dive deeper into the findings, watch our pre-recorded webinar below, where Reason Foundation’s Pension Integrity Project team details the report’s findings, explains key trends, and unpacks what these results mean for state and local governments, public employees, and taxpayers.

Related:

Study: Illinois, Connecticut, Alaska, Hawaii, New Jersey and Mississippi have the most per capita pension debt

The public pension plans with the most debt, worst investment returns of the year

The post Report: State and local pension plans have $1.48 trillion in debt appeared first on Reason Foundation.

The “Gold Standard in Public Retirement System Design Series” reviews the best practices of public pensions and provides a design framework for states struggling under the burden of post-employment benefit debt. This entry in the Gold Standard series examines cash balance plans, which have experienced a recent uptick in adoption over the past few years. This brief examines best practices for implementing a successful cash balance plan, as well as exploring the offerings of cash balance pension plans across the country.

This analysis, “Best practices in cash balance plan design,” reveals that the stability and adequacy of cash balance plans are critically determined by specific design choices. The interest crediting formula, in particular, emerges as the central driver of employer risk. While fixed or market-based crediting methods produce funding volatility nearly identical to that of traditional defined benefit plans, this research demonstrates that conditional formulas—such as those tied to funded status or featuring capped market returns—can meaningfully reduce volatility while still supporting sufficient retirement income.

Effective plan design must also be paired with robust funding policies. In most scenarios, contribution rates between 12% and 20% of pay can achieve full funding and ensure adequate benefits, provided they are coupled with conservative return assumptions and disciplined amortization methods. Open or overly long amortization periods can erode plan solvency even when the underlying benefit structures are designed to be more predictable.

Overly aggressive assumptions in asset smoothing, payroll growth assumptions, and plan maturity can mask funding shortfalls and create compounding deficits. These factors, while often overlooked, prove to be as consequential as the benefit formula itself in determining a system’s long-term risk exposure.

A transition to a cash balance structure offers an opportunity to reset actuarial assumptions, enforce strict funding discipline, and improve stakeholder transparency. This modeling concludes that cash balance plans, when constructed with conditional mechanisms and strong funding rules, offer a stable and sustainable framework for public retirement systems.

Introduction

The continued underfunding of U.S. pension systems has put an enormous strain on state and local governments. To combat this, many plan sponsors have begun to look at alternative designs for their retirement systems. One of those designs is the cash balance plan, a type of retirement plan that blends features of traditional defined benefit pensions with elements of defined contribution (DC) plans, offering a notional employer contribution, a guaranteed interest credit, and improved portability for employees.

Until 2012, there were only four public cash balance plans nationwide. There are now eight such cash balance plans, with two of those being adopted since 2020.

Cash balance plans are positioned as an option that meets the needs of plan sponsors who wish to pare down their risk exposure, while still offering their employees a low-maintenance, guaranteed benefit. For a mobile workforce that tends not to spend their entire careers in government employment, especially in the era of teleworking, cash balance plan portability—on par with defined contribution retirement plans—is attractive. When an employee leaves their employment, for whatever reason, a cash balance plan allows the employee to take the entirety of their contributions, as well as their employer’s, plus the interest gained on those contributions.

See the full report here:

Reason’s Ryan Frost and Zachary Christenen discuss the study’s findings in this webinar:

The post Best practices in cash balance plan design appeared first on Reason Foundation.

ISS and Glass Lewis are private companies that dominate the proxy advisory market, influencing how institutional investors, including public pension funds, vote on matters like executive pay, board elections, and environmental proposals. These votes shape corporate policy, impact stock performance, and ultimately affect the financial stability of the retirement systems that millions of public employees depend on.

This is concerning because neither ISS nor Glass Lewis has any fiduciary duty to the pensioners or taxpayers whose financial futures are affected by their recommendations to public pension systems. They are not legally required to act in the best financial interest of the investors they influence. The companies operate as for-profit businesses, often with significant conflicts of interest. ISS, for example, sells consulting services to the very companies it rates. Glass Lewis has frequently aligned itself with activist investors, which is completely legal, but whose goals may not match those of long-term shareholders and taxpayers funding public pensions.

These conflicts are a concern for taxpayers because public pension systems allow the companies to shape major decisions with virtually no accountability. ISS and Glass Lewis do this through a practice known as “robo-voting,” where most public pension funds automatically follow the recommendations of ISS or Glass Lewis without conducting their own review. This is primarily the public pension systems’ responsibility, but faced with thousands of shareholder proposals each year, some pension systems lean almost entirely on proxy advisor guidance, thereby outsourcing their legal responsibility to third parties with no duty to maximize investment returns for public workers, retirees and taxpayers.

When pension funds follow flawed advice, the result is lower returns and higher taxpayer costs. Because retirement benefits are constitutionally guaranteed, any shortfall turns into public debt. Taxpayers end up footing the bill through higher taxes or cuts to public services and are held responsible for paying public pension debt. It’s a quiet but significant transfer of risk from an obscure corner of the financial system to the public at large.

Despite this, federal regulators have failed to impose meaningful oversight. The Securities and Exchange Commission has spent years in a cycle of proposing, finalizing, and then reversing even modest rules around transparency and accountability for proxy advisors. That inaction has left states to act on their own.

Texas, for example, recently passed legislation requiring proxy firms to disclose whether their advice is based on non-financial considerations. That triggered the lawsuit now making headlines. Reuters reported:

In complaints filed in Austin, Texas federal court, Glass Lewis and ISS said Texas’ law was unconstitutional, undermining their First Amendment right to advise clients even if the state didn’t like the advice.

Signed by Republican Governor Greg Abbott in June, the Texas law targets “non-financial” advice on diversity, equity and inclusion (DEI) matters, and environmental, social and governance (ESG) matters, including for votes at shareholder meetings.

It requires proxy advisers to conspicuously tell clients that the advice is “not being provided solely in the financial interest of the company’s shareholders,” and to provide financial analyses supporting the advice. The law takes effect on September 1.

Glass Lewis and ISS said the law would force proxy advisers to broadcast Texas’ preferred viewpoints when their own differed, including on hot-button issues that a Republican state legislator perceived as having a “hard left bent.”

None of this is about banning ESG or preventing shareholders from having a voice. Shareholder voting is an essential part of corporate governance. But when it comes to public pension systems funded and backed by taxpayers, shareholding voting needs to be grounded in fiduciary duty, not ideological crusades or opaque business models.

Some state pension systems, like Ohio’s, have already severed ties with ISS over concerns about conflicts of interest. Ohio passed a law requiring its public pension funds to make investment decisions with the sole purpose of maximizing investment returns—an explicit rejection of prioritizing ESG goals ahead of funding pensions promised to public workers.

Reforms should start with basic transparency, disclosing how proxy recommendations are developed and who’s paying for them. Robo-voting should be banned, and public pension funds should be required to demonstrate that their votes are based on independent, financially sound analysis.

The financial consequences of these proxy advisory recommendations are real and growing. If we want to protect the retirement security of teachers, police officers, and firefighters, and shield taxpayers from public pension debt they are ultimately held responsible for paying, then it’s time to bring some sunlight to the proxy industry.

The post Proxy firms’ lawsuits highlight need for public pension systems to prioritize investment returns appeared first on Reason Foundation.

The tool has incorporated the data released by public pension systems since our original report was published in September 2024. Public pension systems that ended their fiscal years in June or July of 2024 have been updated. With these additions, the total unfunded public pension liability was $1.61 trillion, up from $1.59 trillion. Correspondingly, the median funded ratio across public pension plans decreased marginally from 76% to 75.8%.  

With the additional data, Reason Foundation’s stress-test projections for public pensions have worsened slightly. For example, under a major market shock, defined as a 10% loss, comparable to the Great Recession of 2007-2009, or the temporary stock market decline after President Donald Trump’s ‘Liberation Day’ tariff announcement, unfunded liabilities are now projected to reach $2.29 trillion by 2025, up from our previous estimate of $2.16 trillion.  

Total public pension assets were $5.07 trillion, a slight increase from the $5.05 trillion previously reported.

The average assumed rate of return for public pension systems fell marginally from 6.89% to 6.87%, continuing the gradual shift toward more conservative investment expectations amid current economic conditions.

Overall, the updated data reinforces previously identified public pension trends. Insufficient public pension contributions, ongoing asset-liability mismatches, and improving, but still overly optimistic, investment return assumptions are ongoing issues for pension systems.

A significant addition to the tool in this mid-year update is the introduction of the state tracker. While previous versions provided individual state and plan data in separate sections, the state tracker now consolidates all relevant public pension data into a single, easily navigable area. This integration enables direct comparisons of pension funding ratios, investment returns, and liabilities across states within one unified interface.

Structural refinements to enhance clarity and ease of use have also been made. Navigation labels have been streamlined, with sections previously titled “Funding Health & Risk Assessment” simplified to “Funding Health” and “Asset Allocation & Projected Returns” shortened to “Asset Allocation.” These changes aim to improve the user experience, especially those accessing information on mobile devices or smaller screens. 

We hope these updates to the Annual Pension Solvency and Performance Report can help inform policy discussions and decisions around pension funding strategies at the local, state and national levels. 

The post With additional plans reporting, total unfunded public pension liabilities in the U.S. grow to $1.61 trillion appeared first on Reason Foundation.

A centerpiece of ESSB 5357 is its manipulation of the assumed rate of return (ARR) on pension investments. The bill raises the long-term investment return assumption from 7% to 7.25% for every plan in the state (except the Law Enforcement Officers’ and Firefighters’ Plan 2). On paper, this higher assumed yield immediately shrinks the calculated liabilities of every plan, not just the older closed Plan 1 systems, but active Plan 2s and 3s as well. For example, by assuming a quarter-point higher return, the total projected benefit obligations of the Public Employees Retirement System, PERS, Plans 2 and 3 drop by roughly $3 billion, and the Teachers Retirement System, TRS, Plans 2 and 3 by about $1.74 billion. In aggregate, the liability for current members across the impacted plans falls by over $5.4 billion on paper due to this assumption change, an accounting reduction in obligations that translates into lower contributions required in the near term. 

In the upcoming 2025-27 biennium, the state would save about $453.5 million in pension contributions and roughly $635.8 million in 2027-29. These short-term savings are achieved by artificially lowering what employers (and Plan 2 employees) pay into the retirement plans. However, by the 2029-31 biennium, if investment returns match what the state assumed prior to this scheme, the savings will disappear as the deferred contributions start coming due.  

The fiscal note also acknowledges an indeterminate but potentially significant impact on local governments. For example, school districts will enjoy lower pension bills now (the bill saves local government employers about $261 million in 2025-27), but they will likely face higher costs after 2030 to make up for it. So, future school budgets could be squeezed just as the state’s will.  

Notably, nothing about the pensions’ actual investments has changed to warrant this rosier assumption. The Pension Funding Council had only recently lowered the ARR to 7.0%, which is still higher than the national average. The Office of the State Actuary explicitly notes in its risk analysis that while the bill “increases the assumed investment return, there is no corresponding change in the actual asset allocation of the pension trust. Therefore, there would be no change to the simulated future investment returns.”  

In plainer terms, the funds are not actually expected to earn more money – the legislature is simply hoping they will and passing the risk of any shortfalls to future taxpayers.  

This kind of assumption gaming shortchanges all plans by backloading their true costs. Each plan will now receive less in contributions than the actuaries recommend, effectively betting that higher returns will make up the difference. If that bet fails—even slightly—the plans will face serious funding gaps.  

With the passage of ESSB 5357, Washington has become the first state since the Great Recession to raise its assumed rate of return, making it an extreme outlier nationally. Across the country, state pension systems have been moving steadily toward lower, more cautious assumptions, with many targeting returns closer to the low 6% range or even below. For instance, New York’s largest pension plan has already adopted an assumption of 5.90%. Washington’s choice to swim against this national trend by adopting a more aggressive return assumption significantly increases the likelihood of future shortfalls. 

Repeating past mistakes 

To veterans of Washington’s pension policymaking, ESSB 5357 rings alarm bells precisely because it echoes past mistakes.  

In the early 2000s, after the dot-com boom, the legislature similarly allowed itself to believe that high investment gains could substitute for hard contributions. At that time, the PERS 1 and TRS 1 plans (already closed to new members since 1977) were briefly overfunded thanks to 1990s market gains, leading lawmakers to boost benefits and underfund annual contributions. The assumed returns remained optimistic, and the amortization of unfunded liabilities was stretched out or recalculated on a rolling basis that continually deferred the day of reckoning.  

By 2003, the state was paying barely half of its annually required pension contribution, and the funding statuses of PERS Plan 1 and TRS Plan 1 deteriorated rapidly. What had been a surplus turned into a large unfunded liability when the market declined because contributions had been insufficient to buffer the loss. It took until the mid-2000s for the state to course-correct by adopting more realistic assumptions and a plan to fully amortize Plan 1’s unfunded accrued liabilities (UAAL) by around 2024. Current law has PERS 1 on track to reach full funding by Fiscal Year 2027 and TRS 1 by Fiscal Year 2025, after decades of disciplined payments. 

ESSB 5357 undermines that hard-won progress by resetting and extending the UAAL amortization yet again. The bill essentially gives a four-year “holiday” from Plan 1 UAAL contributions and then re-amortizes the remaining liability over a fresh 15-year period.  

This is a classic can-kicking strategy. As the state actuary summarizes, UAAL contribution rates will be artificially low in the 2020s (through 2032) but then “higher from FY 2033-2040” to catch up, producing “short-term savings but a long-term cost.”  Short-changing pensions in the present only forces larger, more painful contributions later.  

In the early 2000s, the legislature’s use of overly optimistic assumptions and rolling amortizations left Plan 1 dangerously underfunded when reality fell short, necessitating drastic payment increases in later years. ESSB 5357 risks a repeat, but this time impacting almost all of the plans via the inflated return assumption. 

Underfunding pensions is costly 

Underfunding a pension comes with a significant cost; it’s just another form of debt financing, and an expensive one at that. When a pension plan isn’t fully funded, the shortfall behaves like a loan whose interest rate is the same as the assumed rate of return. In Washington’s case, that “interest rate” is now 7.25%. If you don’t pay what’s needed into the fund, the unpaid portion accrues at roughly 7.25% interest, because that is the foregone investment growth the contributions should have been earning. Failing to at least pay the interest each year means the unfunded liability compounds, growing larger and more daunting. By building less cushion into the plans now, the legislature is gambling on strong market returns every year to avoid new unfunded liabilities. Yet market volatility is inevitable, maybe more so now than ever before.  

It’s important to recognize how costly this form of “borrowing” is compared to other options. Washington’s general obligation bonds, for example, carry interest rates in the 3–4% range in today’s market. By choosing to effectively borrow at 7.25% from the pension fund (by not contributing now and owing more later), the state is locking in a rate of interest far above what prudent fiscal stewards would ever pay on a bond issue.  

This pension debt will also not appear on the state’s balance sheet transparently, even though it’s very real. When it does start to come due, it could hit at a time when revenues are strained, forcing steep contribution hikes on taxpayers and employees. 

From 2030 onward, Washington will have to fund not only the normal pension costs of current workers, but also the delayed debt service from this maneuver—effectively paying double for past obligations.  

That future bill will likely crowd out the state’s ability to pay for other priorities. Every dollar diverted to pay down ballooning pension debt in the 2030s is a dollar not available for schools, healthcare, or infrastructure. Thus, underfunding pensions now doesn’t avoid the obligation; it simply defers it into a costlier and riskier period.  

Pensions are not state piggy banks 

Why would a state with a strong economy and plenty of tax revenue choose this path? The answer is not that Washington lacks the means to fund its pensions—it’s that the legislature has opted to spend those means elsewhere.  

Governor Bob Ferguson’s office backed ESSB 5357 as a way to alleviate pressure on the state budget. In public testimony, the plan was frankly described as a necessary “short-term approach.” In other words, lawmakers faced with a tight budget chose to underfund the pension system rather than trim new spending or find new revenue.  

This is fundamentally a spending choice. The roughly $1.1 billion that will not go into the pension funds over the next four years will presumably be funneled into other programs to avoid tough trade-offs in the operating budget. 

Treating pension contributions as a budgetary piggy bank is a dangerous habit. It’s easy to see the appeal for politicians. Unlike most expenditures, underfunding pensions doesn’t immediately halt a program or anger a constituency today, so the pain is invisible to the public as it is quietly nudged into the future. But it is precisely this kind of shortsighted budgeting that has led to the accumulation of $1.6 trillion of public pension debt across the country.  

Washington has historically been a national leader in responsible pension funding, with a current policy that all plans be brought to a fully funded status. According to the state actuary’s projections, PERS 1 and TRS 1 were finally on the verge of nominal full funding after decades of disciplined payments. There is no structural “affordability” crisis requiring lower contributions – the pension debt was shrinking and would soon be retired. ESSB 5357 interrupts that progress for no reason other than to free up money now.  

It is akin to a homeowner nearing the end of their mortgage deciding to refinance into a longer term just to lower this year’s payments and splurge on a vacation. Yes, the annual payment drops for now, but the debt persists for much longer, and more interest is ultimately paid.  

Washington’s pension obligations are not going away, and underfunding them does nothing to reduce the inevitable bill. It simply passes the bill to future legislators (and taxpayers) when it will be larger and there are fewer options. 

Conclusion 

This is not a question of ability to pay—it’s a question of willingness to prioritize the promises made to public workers.  

ESSB 5357’s approach of diverting pension funding undermines the long-term stability of Washington’s retirement systems. The bill’s manipulation of assumptions and payment schedules might help within a single budget cycle, but at the expense of the state’s pension solvency and with a higher price tag down the line. History has shown that it is far better to pay pension bills when they are due, rather than deferring them.  

Washington’s leaders should recall the lessons of the early 2000s, when underfunding and optimistic projections led to ballooning pension debt that took years of discipline to fix. They should also heed the state actuary’s implicit advice: maintain realistic assumptions and make contributions at the level required to keep the systems healthy, even when budgets are tight.  

The post Washington lawmakers passed a ticking time bomb for pension solvency and the state budget   appeared first on Reason Foundation.

Alaska House Bill 78 proposes reinstating a defined benefit (DB) pension plan for new public employees in Alaska. The stated goal is to improve recruitment and retention, but it is important to evaluate whether this change addresses the workforce challenges you face and whether it does so in a way that’s fiscally responsible and sustainable. 

Our actuarial modeling shows that, under a best-case scenario, HB 78 would cost Alaska an additional $2.1 billion over the next 30 years. Under a more realistic scenario, if investment returns over the next 30 years resemble those Alaska has experienced over the past 23 years, the cost increases to $11.4 billion​. 

The outcome of this legislation is directly tied to investment assumptions. HB 78’s costs are based on an assumed rate of return of 7.25%, placing it among the top five highest assumptions in the nation. Yet Alaska’s pension funds have earned only 5.8% annually on average since 2001​. That disconnect matters. If Alaska adopted a more realistic rate—say, 6.5%, which aligns with current actuarial best practices—current unfunded liabilities would immediately increase by $2 billion​. Getting these assumptions right is critical. Otherwise, you risk creating a benefit structure that appears affordable on paper but proves unsustainable in practice. This body should be all too familiar with that practice, as you are still on the hook to pay $7.6 billion in unfunded pension liabilities to plans that have been closed for two decades. 

Advocates of HB 78 often cite employee turnover as a rationale for moving back to a DB system. But the data doesn’t support the idea that Alaska is an outlier in this area—or that a DB plan would solve the problem. 

According to our analysis of workforce data, Alaska actually retains public workers better than most states. In fact, from 2012 to 2023, Alaska had the 11^th-lowest state employee turnover rate in the country, despite operating under a defined contribution (DC) system. During this period, Alaska’s average annual turnover rate was 13.6%, well below the national average of 18.7%​. 

Even in more recent years, when public sector workforce challenges have intensified nationwide, Alaska has remained relatively stable. From 2019 to 2022, turnover rose across all states, largely driven by pandemic-era labor disruptions. In Alaska, turnover reached a high of 17.5%, while the national average reached a high of 22.9%. This suggests that Alaska is experiencing the same labor market pressures as other states, not something unique to your retirement system’s design. 

There’s also no clear evidence that states with DB plans perform better on recruitment or retention. Oklahoma, which transitioned to a DC plan in 2011, has not seen a rise in public employee turnover. In fact, it now has the second-lowest turnover rate among neighboring states, most of which still offer traditional pensions​. 

If recruitment and retention are unlikely to change from HB 78, who does this bill actually benefit? Because for most new employees in Alaska, HB 78 won’t actually improve retirement outcomes. Based on our modeling of Alaska’s benefit structure, more than 90% of new hires would receive lower retirement benefits under the proposed DB plan. That’s because most employees don’t stay long enough to benefit from a back-loaded DB formula. According to the pension system’s own assumptions, 50% of public safety workers and 70% of teachers leave within 10 years​. For these employees, the current DC plan provides better retirement value and portability. Yet this bill would completely eliminate this DC option. 

So where is the real gap in Alaska’s retirement security? It’s not in the pension structure; it’s in coverage under the Supplemental Annuity Plan, or SBS. Alaska public employees don’t participate in Social Security. SBS was designed as a replacement, providing a second layer of retirement income funded equally by the employer and employee with the same contributions that otherwise would have gone into Social Security. Because SBS acts as a true retirement account, it provides substantially better benefits than is given to participants of Social Security. 

However, teachers are not covered by SBS, leaving them with no Social Security and no SBS benefit in retirement. This is a significant shortfall. Our modeling shows that, for a full-career teacher, SBS would provide an additional $60,000 per year in retirement. This is 73% greater than Social Security would be for the same worker​. Expanding SBS coverage would do more to enhance retirement security than shifting back to a DB system that helps only a small segment of long-tenured workers. 

In summary, Alaska is not facing a unique retention crisis, nor does it lag behind other states. Your turnover rates are better than average, and your DC plan—when combined with SBS—is already delivering retirement benefits better than most other states. HB 78 would add significant financial risk without clear evidence of improved outcomes. A more productive approach would focus on expanding SBS coverage and strengthening your existing retirement framework. 

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Thank you for the opportunity to offer my brief analysis of Substitute Senate Bill (SSB) 5085, which merges the Public Employees Retirement System Plan 1 (PERS 1) and the Teachers Retirement System Plan 1 (TRS 1) with the Law Enforcement Officers and Firefighters Plan 1 (LEOFF 1). While well-intentioned, this bill raises serious legal, financial, and fairness concerns that make it an unwise public policy. 

SSB 5085 proposes shifting assets from the overfunded LEOFF 1 retirement system to cover benefit increases in two underfunded plans, PERS 1 and TRS 1. This move not only raises potential IRS compliance issues but also sets a concerning precedent. Under SSB 5085, pension funds would no longer be managed strictly for their intended beneficiaries but instead used to shore up unrelated liabilities and grant new benefits in another plan. That is a fundamental change in how public pension systems have historically operated. 

Additionally, while the bill is being presented as a cost-saving measure, the Office of the State Actuary has indicated that those savings may never materialize. If the Combined Trust Fund earns an average return of 6% over the next 25 years—a rate in line with long-term forecasts for many state pension systems nationally—this bill would actually increase costs for taxpayers by $1.5 billion. If there are lower market returns in 2025, which looks likely, the state savings from the bill are nearly eliminated. That risk should not be overlooked. 

Perhaps the most important point to recognize is that the state has more than fulfilled its commitments to PERS 1 and TRS 1 members—providing billions more in benefits than these retirees were originally promised. When these plans were designed, members understood that they were not guaranteed a cost-of-living adjustment (COLA). Because of this, their pension contributions and benefits were structured differently from those in other plans that do include an automatic COLA. 

Despite this, the legislature has gone beyond their agreement and provided COLAs numerous times between 1989 and 2011 and again in 2018, 2020, 2022, 2023, and 2024. These increases were granted without funding, effectively adding costs that were never anticipated. Even more importantly, since 1987, every retiree in PERS 1 and TRS 1 has had the option to purchase a COLA through an actuarial reduction to their pension benefits. This mechanism was put in place so that members could individually decide whether inflation protection was a priority for them at the time of retirement. 

However, because the state continued to grant COLAs at no cost to retirees, there was no incentive for members to opt into the buyable COLA. Understandably, most chose not to reduce their initial benefits when they assumed they might receive an adjustment later on. Many of these retirees also left public service in their early-to-mid-50s, fully aware that their pensions did not include automatic COLAs. They made their retirement decisions accordingly and, in many cases, had decades to plan for inflation. Yet this bill now seeks to fund additional benefits for them using assets from LEOFF 1—a group that has no connection to this issue whatsoever. 

SSB 5085 presents risks that should give pause: it threatens the integrity of pension funding by increasing liabilities in two closed plans, it will likely not deliver the savings it claims, and it sets a precedent that could lead to future financial instability. 

I urge the committee to consider alternative ways to address Plan 1 members’ concerns without creating new risks for Washington’s pension systems and to ensure that any new benefits are funded in a way that is fair, legal, and fiscally responsible. 

The post Washington Substitute Senate Bill 5085 would increase pension costs appeared first on Reason Foundation.

HB 78’s estimated costs are dependent on a flawed discount rate. The claim that HB 78’s proposed changes would not require any additional state funding relies on the pensions’ current investment return assumption being met. Alaska’s pension plans would need to achieve overly-optimistic 7.25% annual returns on investments for decades to avoid additional costs. 

• Overly-optimistic investment return assumptions were a major contributor to the $7.6 billion debt that is still owed on Alaska’s legacy pension plans, the Alaska Public Employees’ Retirement System, PERS, and Teachers’ Retirement System, TRS. 

• Since 2001, Alaska’s pension plans have earned just 5.8% annual returns on average. 

• Nationally, the average assumed rate of return used by public pension systems is around 6.9%, so Alaska’s current return rate assumption is rosier than most other states. 

• The discount rate is used when pricing the amount needed from employees to purchase their “past service.” The plan continuing to earn under 7.25% or dropping that assumed rate would add hundreds of millions of dollars in new unfunded liabilities.  

HB 78 could cost Alaska an additional $11.4 billion over the status quo. Actuarial analysis of Alaska PERS and TRS that anticipates market stress over the next 30 years similar to market stresses from 2001-2024 shows HB 78 likely exposes the state to significant additional costs. 

Bottom Line

HB 78 could cost Alaska more than $11 billion in the coming decades. Since most public employees leave their positions before being fully eligible for their pension benefits, this could be very costly legislation that only benefits a relatively small group of workers.

Full Backgrounder: House Bill 78 exposes Alaska to significant additional costs

The post House Bill 78 exposes Alaska to significant additional costs appeared first on Reason Foundation.

• Arizona Public Safety Personnel Retirement System, PSPRS, Tier 3 arose from a bipartisan, stakeholder-negotiated pension reform in 2016, after a rapid freefall saw PSPRS decline from 120% funded in 2001 to nearly 40% funded by 2016.
• Tier 3 included a risk-managed pension design with a 50/50 contribution rate split between employers and employees, consistent with many other state pension systems, including the Arizona State Retirement System, Washington State’s public safety pension, and Michigan’s teacher pension.
• 50/50 cost sharing is foundational to Tier 3 risk management and a key reason employers have felt confident enough in PSPRS’ trajectory to make $5 billion in supplemental contributions since 2019, improving PSPRS to nearly 70% funded today.

Senate Bill 1365 would break Tier 3’s 50/50 cost-sharing mechanism and risk higher taxpayer costs

• Senate Bill 1365 would cap the contribution rate paid by Tier 3 employees at 9.5% and require employers to cover any needed remainder in the likely event of underperforming markets.
• Reason Foundation’s actuarial modeling for PSPRS forecasts that SB 1365 could result in taxpayers being required to cover approximately $1 billion in unanticipated additional costs over the next 30 years, assuming market conditions similar to those seen since 2000.
• Applying a cap on employee contributions would return to the types of design features that allowed PSPRS to get over $10 billion underfunded.

SB 1365 unlikely to affect recruitment & retention

• The push to cap employee contribution rates in PSPRS Tier 3 is rooted in the idea that it would help improve recruitment and retention, but states where pensions already have caps on employee contribution rates have also seen recruitment and retention challenges. 
• Studies and actual employee turnover data show that pensions rank far down the list of employee priorities compared to others like salary, flexibility, work-life balance, job satisfaction, and upward mobility.
• States that have expanded employee pension benefits under similar logic since the Great Recession have seen higher costs but no discernable change in recruitment and retention.

Takeaway

With over $7 billion in unfunded liabilities remaining to tackle, it would be poor financial stewardship to fundamentally alter the design of a successful PSPRS reform only seven years into a multidecade turnaround project, especially given the weak influence pensions have on employee recruitment and retention.

Full Backgrounder: Arizona Senate Bill 1365 threatens higher taxpayer costs and pension risks 

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Thank you for the opportunity to submit technical comments regarding Michigan House Bill 6060. 

The bill you are considering today would have profound consequences for your teacher pension system, for the entire public K-12 education system in Michigan, for the ability of Michigan’s school districts to manage their budgets and financial health for the long term, and for every public service offered by the state. While the costs associated with the bill are breathtaking—between $17 billion to $20 billion in guaranteed new school district spending over the next 30 years—the risks to K-12 service delivery and long-term school district financial solvency are even more extreme. 

Due to its far-reaching implications, a bill of this magnitude demands rigorous analysis. However, this bill has not received a proper actuarial analysis, a critical step for understanding how decisions impacting every K-12 hire today can ripple out decades into the future and move in unforeseen directions. In fact, actuarial analysis of proposed pension benefit changes of this magnitude is actually required by law in Michigan under MCL Section 38.1140h, a step that did not happen during the House process of passing the bill. We commissioned a legal analysis from the Grand Rapids-based Plunkett Cooney law firm to inform our assessment of the updated legislation. 

The entire letter is available here, and the summary conclusion is as follows:  

“[I]t is our opinion that the amendments in HB 6060 to the Public School Employees Retirement Act will result in increases to employees’ pension benefits. That increase triggers the requirements of MCL 38.1140h(5) which include seven days notice and a supplemental actuarial analysis of the impact of the proposed changes on the pension funds.” 

Despite the seeming violation of state law associated with House passage, we have built a robust actuarial model for the Michigan Public School Employees Retirement System, MPSERS, to help policymakers and stakeholders understand the potential impacts of HB 6060. 

The Great Recession was devastating for teacher pension systems across the country, generating hundreds of billions of dollars in underfunded liabilities, driving up retirement-related spending for public K-12 systems, and forcing money intended for the classrooms to be spent on higher payments to cover the retirement of past educators. MPSERS was no different and arguably was hit harder than most, as the legislature had failed to fully fund the annual required actuarial contributions to the plan for several years prior. Accordingly, MPSERS entered the Great Recession with approximately $9 billion in unfunded liabilities in 2007, which skyrocketed to nearly $25 billion by 2011.  

This prompted one wave of reform in 2012 that made some fairly small improvements around the edges, but that reform failed to meaningfully move the needle on cost and risk due to a flawed design. In 2017, the legislature enacted the current plan design of MPSERS to avoid a doubling of unfunded liabilities and annual pension contributions, which are already projected to exceed $5 billion per year in the coming decades. The logic was to offer all new teachers a choice of two risk-managed plan designs, a defined contribution plan or a risk-managed hybrid pension design that splits costs and risks equally with teachers, a fair and even balance when considering that the teacher then receives a 100% taxpayer guaranteed retirement for life. This was an improvement upon the previous benefit tier, where teachers were covering two-thirds of their pension costs. 

Since the 2017 reform took effect, the legislature has enacted a range of additional improvements to funding policy, assumptions setting, and other key pension mechanisms on a bipartisan basis. Some of these improvements involved recognizing previously hidden underfunding and aggressively moving to pay down MPSERS’ unfunded liabilities much faster. Today, MPSERS stands at $29 billion underfunded, but it also now has several key financial guardrails in place, such that there is a realistic plan to pay off that debt within the next 15 years. 

HB 6060 would place all new hires into a re-risked pension system instead of a de-risked one by eliminating critical protections against financial risk. The bill eliminates employee contributions to their pensions, forcing public school districts to bear nearly the entire cost.  It also allows the purchase of five years of credited service for all teachers and guarantees a 6% conversion rate on those liabilities.   

Our analysis and actuarial modeling find that:  

• House Bill 6060 will add between $17 billion to $20 billion in new employer costs over the next few decades, depending on market performance. Because the recently enacted 15.21% rate cap for employers applies to unfunded liability payments and not to normal costs, making up the loss of employee contributions will be entirely placed on school districts and university employers. 

• HB6060 would require immediate increased additional annual employer contributions of between 7 to 10 percent of payroll that would persist for at least the next 30 years.  

• If MPSERS were to hit all of its assumptions and pay off all of its current unfunded liabilities by 2037 as planned, the annual employer “normal cost” contributions under HB 6060 contributions would be 13.7% in perpetuity, nearly double the 7% employer normal cost today. 

Further, transferring current defined contribution account balances to MPSERS pension at the current discount rate would create a major immediate financial risk of immediate underfunding of those transferred liabilities. The bill would allow defined contribution plan participants to abandon their plan, transfer up to five years of credited service toward an actuarially equivalent pension benefit, and join the defined benefit plan. The member’s previously earned service would be transferred using a relatively high discount rate of 6.0%. Such transfers would create the risk of a pension-obligation-bond-like situation where any downturn in market performance (meaning, any year where investment returns underperform 6%) or any future lowering of the MPSERS assumed rate of investment return would generate immediate unfunded liabilities. The bill would further allow a first-of-its-kind purchase of defined benefit service by defined contribution members who have at least 10 years of service. This means that a five-year purchase of service option is available to every single teacher in Michigan, regardless of which plan (DB or DC) they choose.  

In conclusion, HB 6060 would reverse decades of responsible pension reform, skyrocket pension costs, make it almost impossible to increase teacher salaries in perpetuity, and force local governments to make difficult spending tradeoffs with the rest of their budget in order to put more resources toward MPSERS. The move would also likely be viewed as a credit negative by the rating agencies, who looked favorably upon the 2017 reform as being a credit-positive factor for the state’s long-term financial stability. Instead of moving backward, we believe the legislature should focus on restoring the funding that it diverted from MPSERS this year in order to remove pension debt from the state’s books as fast as it can.  

Read the full legal analysis: Michigan House Bill 6060 Legal Opinion for Reason Foundation

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Thank you for the opportunity to provide testimony on Michigan Senate Bills 165-167, which propose significant changes to the Michigan State Employees’ Retirement System, SERS, and State Police Retirement System. These bills would dramatically increase costs for specific employee groups, including corrections officers, by removing new hires from the SERS defined contribution (DC) retirement plan and placing them in the hybrid pension plan currently available to state police officers. Additionally, the bills would allow current SERS employees to purchase years of service credit in the state police defined benefit plan, up to the total years they have contributed to SERS.  

Fiscal impacts 

Defined benefit pensions rely on several actuarial assumptions to be accurate. If they aren’t, unfunded liabilities begin to accumulate. As of today, Michigan still has $49 billion worth of unfunded pension liabilities to pay off. With that amount of debt still left to pay off, it was surprising to see these bills pass the Senate without a single study on potential cost impacts. Only a single sentence in the three-page fiscal note mentioned potential risks. It stated:  

“Other unfunded liabilities could accrue in the future if actual conditions failed to meet actuarial assumptions … but future liabilities are not known, assumed, or calculated in this analysis.” 

As a pension proposal of this magnitude will require generations of employers and taxpayers to pay for benefits, the evaluation of this legislation is required to be better than “not known, assumed, or calculated.” Therefore, we built our own actuarial model to study the long-term costs of this proposal, and the results show that this pension swap would have a major impact on both required employer contributions and the funded status of the state police pension system.  

Under a best-case scenario, where 100% of plan assumptions are met 100% of the time, the additional cost of this pension proposal would be just north of $800 million over the next 30 years. Because assumptions are never met 100% of the time, it’s important to look at what would happen under a scenario with more realistic investment returns. If the next 30 years of investment experience matched the previous 30, with multiple major market losses, this proposal could cost up to $1.85 billion.  

Recruitment and retention 

While proponents of these bills suggest that shifting these employee groups to the state police pension plan will improve staffing levels, we have yet to see experience play out in other states that show one retirement plan design is better than another for overall recruitment and retention. It is also important to recognize that, based on most non-partisan surveys of employees, today’s workforce increasingly values and needs portability and flexibility in retirement benefits. Therefore, we have strongly advocated for at least offering an optional defined contribution plan to new employees because it would align more closely with the career mobility patterns of modern employees. Unfortunately, that option would be completely removed for all new employees covered by these bills because the SERS DC plan would be closed to new entrants.  

States like Michigan that have moved toward offering portable plans to public employees have seen improvements in long-term fiscal stability while still offering robust retirement benefits. Enhancing the existing DC plan with targeted longevity bonuses, rather than reverting to a legacy DB system with unknown future costs, could achieve the same recruitment and retention goals without laying “not known” costs on taxpayers and jeopardizing the state’s financial health. 

Full Testimony: Michigan Senate Bills 165-167

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Michigan House Bill 6060 would have profound consequences for your teacher pension system, for the entire public K-12 education system in Michigan, for the ability of Michigan to manage its state budget for the long term, and for every public service offered by the state. While the costs associated with the bill are breathtaking—between $17 billion to $20 billion in guaranteed new state and school district spending over the next 30 years—the risks to K-12 service delivery, long-term school district financial solvency, and the entire state budget are even more extreme. 

Due to its far-reaching implications, a bill of this magnitude demands rigorous analysis. However, this bill has not even been accompanied by a fiscal note, let alone a proper actuarial analysis–both of which are critical to fully understand how decisions impacting every K-12 hire today can ripple out decades into the future and move in unforeseen directions. Fortunately, we have built a robust actuarial model for the Michigan Public School Employees’ Retirement System, MPSERS, to help you understand the potential impacts of House Bill 6060. 

The Great Recession was devastating for teacher pension systems across the country, generating hundreds of billions of dollars in underfunded liabilities, driving up retirement-related spending for public K-12 systems, and forcing money intended for the classrooms to be spent on higher payments to cover the retirement of past educators. MPSERS was no different and arguably was hit harder than most, as the legislature had failed to fully fund the annual required actuarial contributions to the plan for several years prior. Accordingly, MPSERS entered the Great Recession with approximately $9 billion in unfunded liabilities in 2007, which skyrocketed to nearly $25 billion by 2011.  

This prompted one wave of reform in 2012 that made some fairly small improvements around the edges, but that reform failed to meaningfully move the needle on cost and risk due to a flawed design. In 2017, the legislature enacted the current plan design of MPSERS to avoid a doubling of unfunded liabilities and annual pension contributions, which are already projected to exceed $5 billion per year in the coming decades. The logic was to offer all new teachers a choice of two risk-managed plan designs, a defined contribution plan or a risk-managed hybrid pension design that splits costs and risks equally with teachers, a fair and even balance when considering that the teacher then receives a 100% taxpayer guaranteed retirement for life. This was an improvement upon the previous benefit tier, where teachers were covering two-thirds of their pension costs. 

Since the 2017 reform took effect, the legislature has enacted a range of additional improvements to funding policy, assumptions setting, and other key pension mechanisms on a bipartisan basis. Some of these improvements involved recognizing previously hidden underfunding and aggressively moving to pay down MPSERS’ unfunded liabilities much faster. Today, MPSERS stands at $29 billion underfunded, but it also now has a number of key financial guardrails in place, such that there is a realistic plan to pay off that debt within the next 15 years. 

House Bill 6060 would eliminate critical protection against financial risk by eliminating employee contributions to their pensions (forcing the state and public school districts to bear the entire cost), allowing five years of credited service purchase, and guaranteeing a 6% conversion rate on those liabilities, and allowing all new hires to enter a re-risked pension system instead of a de-risked one. 

Our analysis and actuarial modeling find that:  

• House Bill 6060 will add between $17 billion to $20 billion in new employer costs over the next few decades, depending on market performance. Given that the legislature just lowered the cap on local school district MPSERS contributions, this means that the state is likely to bear the majority of responsibility for these costs, which will impact every other area of state government and crowd out spending on other important services. 

• HB 6060 would require immediate increased additional annual employer contributions of between 7 to 10 percent of payroll that would persist for at least the next 30 years.  

• If MPSERS were to hit all of its assumptions and pay off all of its current unfunded liabilities by 2037 as planned, the annual employer “normal cost” contributions under HB 6060 contributions would be 13.7% in perpetuity, nearly double the 7% employer normal cost today. 

Further, transferring current defined contribution account balances to MPSERS pension at the current discount rate would create a major immediate financial risk of immediate underfunding of those transferred liabilities. The bill would allow defined contribution plan participants to transfer up to five years of credited service toward an actuarially equivalent pension benefit, but their previously earned service would be transferred using a relatively high discount rate of 6.0%. Such transfers would create the risk of a pension-obligation-bond-like situation where any downturn in market performance (meaning, any year where investment returns underperform 6%) or any future lowering of the MPSERS assumed rate of investment return would generate immediate unfunded liabilities. 

In conclusion, HB 6060 would reverse decades of responsible pension reform, skyrocket pension costs, make it almost impossible to increase teacher salaries in perpetuity, and force appropriators to make difficult spending tradeoffs with the rest of the state budget in order to put more resources toward MPSERS. The move would also likely be viewed as a credit negative by the rating agencies, who looked favorably upon the 2017 reform as being a credit-positive factor for the state’s long-term financial stability. Instead of moving backward, we believe the legislature should focus on restoring the funding that it diverted from MPSERS this year in order to remove pension debt from the state’s books as fast as it can.  

Full Testimony: Michigan House Bill 6060

The post Michigan House Bill 6060 would negatively impact the teacher pension system appeared first on Reason Foundation.

Our analysis and actuarial modeling of the Michigan State Employees’ Retirement System, SERS, suggest that House Bill 6061 could undo decades of progress in public pension stewardship by reopening an underfunded legacy pension system and eliminating the current defined contribution retirement plan. Together, these changes would re-expose Michigan to unnecessary unfunded liabilities, financial risks, and billions in hidden costs that would ultimately be borne by taxpayers and crowd out other spending priorities. 

Since the 1990s, several states facing major public pension funding challenges have successfully transitioned to lower-risk retirement designs. Michigan was among the first to do this in 1997 by launching the Michigan SERS Defined Contribution (DC) plan. Over time, that DC plan has seen several improvements and today should be seen as a quality, competitive retirement benefit (relative to either the public or private sector) that meets many best practices.  

Unfortunately, after the 1997 reform, the state failed to properly fund the legacy SERS pension for much of the next two decades, which helped yield over $5.4 billion in unfunded liabilities today. Importantly, all things being equal, the SERS unfunded liability situation would have been much worse had all the employees hired between 1997 and today entered the legacy pension instead of the current DC plan, given that those additional pensioners over nearly 30 years would have represented billions of dollars in additional accrued pension liabilities.  

Instead, thanks to Michigan SERS’ DC reform, the total accrued pension liabilities of SERS finally peaked in 2021 and are now beginning to decline, and retirement costs for every employee hired since 1997 are 100% fixed as a share of payroll, unlike the spikes and cost volatility you’ve experienced in all of your state pension systems this century. 

It is also important to note that the $5.4 billion in current unfunded liabilities today are attached to the legacy pension system that closed back in 1997. By contrast, and by definition, there are no taxpayer-guaranteed “liabilities” in a defined contribution plan. Given that almost 30 years later, the state is still trying to manage the $5.4 billion in unfunded liabilities related to employees/retirees hired before 1997, it follows that re-opening the exact same pension system back up now would simply expose the state to the same financial and budgetary risks that created the current pension debt. 

We conducted some preliminary actuarial modeling and found that under HB 6061, Michigan SERS’ unfunded liabilities could rise to well over $8 billion over the next 15 years under realistic market underperformance scenarios. 

Further, transferring defined contribution account balances to the Michigan SERS pension at the current discount rate would create a major immediate financial risk of immediate underfunding of those transferred liabilities. The bill would allow defined contribution plan participants to transfer up to five years of credited service toward an actuarially equivalent pension benefit, but their previously earned service would be transferred using a relatively high discount rate of 6.0%. Such transfers would create the risk of a pension-obligation-bond-like situation where any downturn in market performance (meaning, any year where investment returns underperform 6%) or any future lowering of the SERS assumed rate of investment return would generate immediate unfunded liabilities in a newly reopened SERS system. 

Lastly, the bill has not received a fiscal note, a long-term actuarial analysis, any pension stress testing of the new design, nor any scrutiny from legislative finance and retirement committees, leaving important questions for taxpayers unanswered. Major retirement plan design changes necessitate long-term actuarial analysis and stress testing to ensure financial risks to governments are transparent and clearly understood beforehand. 

Our overall assessment is that HB 6061 would bring back a system that exposes taxpayers to the same risk of unfunded liabilities that prompted the closing of that pension almost three decades ago. HB 6061 would undo a nearly 30-year-old pension reform that has been working effectively to manage financial risks and personnel costs for state agency employers and which has helped taxpayers avoid billions of dollars in additional unfunded liabilities.   

Thank you very much for the opportunity to submit testimony. We stand ready to respond to any questions the committee may have related to this subject. 

Full Testimony: Michigan House Bill 6061 (2024)

The post Michigan House Bill 6061 would undo public pension progress appeared first on Reason Foundation.

• Overly optimistic investment return assumptions: Since 2000, 99% of public pension funds have failed to meet their average assumed rates of return (ARRs), and 85% of public pension systems’ average returns fail to meet their current ARRs.

• Chronic investment underperformance: 99.5% of public pension funds underperformed the S&P 500 over the past 23 years, and 60% underperformed a simple 60/40 equity-fixed income portfolio. 

• Taxpayers’ costs rise: Employer—taxpayer—contributions have increased steadily, primarily to cover amortization costs—the expense of paying down pension debt —which now surpass the costs of funding current pension benefits (normal costs) nationally. 

• Trends in the distribution of pension debt: The two most pension-indebted states, Illinois and New Jersey, hold nearly 43% of all state-level pension debt while accounting for just 6.6% of the U.S. population.

The Pension Integrity Project hopes the Dec. 5 webinar provides valuable insights into the evolving challenges of public pensions and looks forward to discussing these issues further.

The post Webinar: 2024 Public pension solvency and performance report appeared first on Reason Foundation.

The Texas Local Fire Fighters Retirement Act (TLFFRA), in its current form, ties the hands of municipal governments, forcing them to resort to precarious financial strategies that offer only temporary respite. State legislative reform is urgently needed.

The structural flaws of the Texas Local Fire Fighters Retirement Act

The Texas Local Fire Fighters Retirement Act is a state law that governs retirement systems for firefighters employed by cities or other political subdivisions in Texas. These systems are managed by a board of trustees, which typically includes municipal representatives, firefighters, and additional appointed members. 

The TLFFRA gives each participating pension board the flexibility to design its retirement plan and determine benefit levels, eligibility criteria, and contribution rates, which are paid for by local tax dollars. The law requires regular actuarial evaluations to monitor the financial health of the pension systems and mandates the pension boards to adopt adjustments as needed to maintain fiscal balance.

Ironically, the structure of these pension boards has often led to significant imbalances. Take Midland, for example, where the seven-member pension board includes three active firefighters, the mayor (or a designee), and the city’s chief financial officer. The remaining two seats are chosen by a vote of these five members. As firefighters control three of those votes, they effectively hold the power to shape the board’s makeup. What should be a balanced board skews heavily in favor of firefighter interests, leaving the city with just two representatives advocating for taxpayer concerns despite the firefighters, in most cases, bearing zero responsibility to pay for unfunded liabilities.

In addition to unbalanced board representation, cities also have no authority to amend the pension benefits offered to new hires under TLFFRA. Any changes to the pension plan must be agreed and voted upon by the active firefighter membership. This structure inherently disincentivizes firefighters from agreeing to necessary benefit adjustments for future hires, as they bear no direct financial risk for their constitutionally protected benefits’ impact on county and city budgets. This lack of financial accountability among firefighters creates a cycle where pension promises remain generous while the means to fund them become increasingly strained. 

Simply put, firefighters design and run the firefighter pension system while taxpayers pay when it goes off the rails. 

TLFFRA sparks a rash of pension obligation bonds that rarely work

Pension obligation bonds (POBs) are not without risk and are a poor replacement for actual funding and benefit adjustments. These bonds are bets that the returns on invested funds will exceed the bonds’ interest costs. However, history has shown that this strategy can lead to disastrous outcomes if market conditions deteriorate. Cities like Stockton and San Bernardino in California experienced severe financial crises when their POB-funded pension strategies failed, leading to bankruptcy and immense taxpayer burdens.  

Today’s high-interest rate environment makes it a terrible time for Texas cities to pay off their unfunded pension liabilities with pension obligation bonds. If the investments underperform the interest rate of the borrowed funds or the market crashes, the returns will not cover the cost of the debt, leaving the issuer with even larger pension obligations.

Midland, Texas

Midland serves as a stark example of the detrimental effects of the Texas Local Fire Fighters Retirement Act. In recent years, Midland has seen its pension fund’s unfunded liabilities grow to $121 million due to the combined effects of lavish benefit promises and underperforming investments. As a result, the city needs to allocate more of its budget to cover pension costs, which limits its ability to fund other essential services. The city’s leaders are caught in a financial bind where raising taxes or cutting services are the only immediate options, both of which are politically and socially challenging.

The city’s firefighter pension fund crisis has escalated to the point where public safety costs consume over 50% of the city’s general fund budget. This immense financial pressure has forced Midland to seek emergency solutions to bridge its pension funding gap. Failure to properly address the issue will result in the pension system soon exhausting its assets, which will lead to costs triple or quadruple what they are today. 

Despite the mayor and city council’s efforts, the existing TLFFRA framework leaves them with limited options to control these escalating costs. Over the past three years, Midland has presented various solutions to its firefighters to address the pension fund shortfall, including multiplier changes, final average salary changes, removal of pension spiking, and contribution rate changes. Unfortunately, these proposals have been met with significant resistance, with firefighters rejecting nearly all of them apart from a small increase in contribution rates. This stalemate has worsened the financial crisis as the city cannot unilaterally implement changes to the pension plan under the current TLFFRA regulations. 

Irving, Texas

Irving’s issuance of an $86.3 million POB in 2021 reflects the desperate measures cities are resorting to under the TLFFRA. The decision to issue pension obligation bonds was driven by the need to stabilize the firefighter pension fund without resorting to drastic measures, such as slashing benefits or significantly increasing taxes. The plan sat at a funded ratio of 64%, just a couple of bad years of investment returns away from spiraling into insolvency. 

Longview, Texas

Longview has similarly issued pension obligation bonds to address its firefighter pension fund issues. In 2022, the city approved a $45.6 million bond to stabilize its Firemen’s Relief and Retirement Fund, which sat at just 41% funded. This move mirrors Irving’s approach and underscores the widespread reliance on risky financial instruments to manage pension liabilities under the TLFFRA. Longview took another step backward by also reducing the employer contribution rate to the plan, dropping from 19% to 12%.

Longview’s pension fund challenges, like its sister cities around Texas, were compounded by a history of underfunding and investment shortfalls. By issuing

POBs, the city aims to shore up its pension fund and reduce its unfunded liabilities on paper. However, this strategy does not address the underlying issues of pension plan design and governance that have led to the current financial predicament. The reliance on POBs is a stopgap measure that postpones the day of reckoning while exposing the city to even more financial risk if market conditions become unfavorable.

The need for legislative reform

With the Texas Local Fire Fighters Retirement Act preventing reasonable solutions, many municipal governments are left with having to make poor decisions for their taxpayers, highlighting the need to reform this law. 

The Texas Legislature should consider amending the statutes governing firefighter pensions. Key reforms should include:

1. Allowing cities to adjust benefits for new hires: Municipalities need the flexibility to modify pension benefits for new hires to ensure long-term sustainability.
2. Increasing transparency and accountability: The Texas Pension Review Board has highlighted many issues with these TLFFRA plans, but has limited authority to force changes. 

Without these reforms, Texas cities will continue to face escalating public pension liabilities, jeopardizing their financial stability and burdening taxpayers. It is imperative for the legislature to act now to secure a sustainable future for both Texas cities and their firefighters.

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Reason Foundation’s 2024 Pension Solvency and Performance Report provides a comprehensive overview of the current status and future of state and local public pension funds. As the nation navigates another year marked by significant economic fluctuations and demographic shifts, this report aims to assess the resilience and adaptability of U.S. public pension systems. This analysis ranks, aggregates, and contrasts plans by funding health, investment outcomes, actuarial assumptions, and many other indicators.

This report marks the inaugural edition of an annual series by Reason Foundation’s Pension Integrity Project, dedicated to addressing the problem of unfunded public pension liabilities that threaten the fiscal stability of many states, cities, and counties. The objective of this analysis is to deliver clarity and foster a deeper understanding of the challenges confronting U.S. public pension systems, public workers, state and local governments, and taxpayers. The main findings are prominently highlighted in bullet points at the beginning of each section.

Unfunded pension liabilities

Public pension systems in the U.S. have seen a significant increase in unfunded liabilities, particularly during the Great Recession. Between 2007 and 2010, unfunded liabilities grew by over $1.11 trillion—a 632% increase—reflecting the financial challenges faced during that period. Despite some improvements in funding ratios over the last decade, these liabilities have continued to rise, underscoring ongoing financial pressures.

As of the end of the 2023 fiscal year for each public pension system, total unfunded public pension liabilities (UAL) reached $1.59 trillion, with state pension plans carrying the majority of the debt.

The median funded ratio of public pension plans stood at 76% at the end of 2023, but stress tests suggest that another economic downturn could significantly increase unfunded liabilities, potentially raising the total to $2.71 trillion by 2025.

Funded ratios of public pensions

The funded ratio of public pensions, which indicates the percentage of promised benefits that are currently funded, has experienced considerable fluctuations. After peaking at 95% funded in 2007, the funded ratio of U.S. public pension systems fell to 63% during the Great Recession. Although funded ratios have recovered somewhat, they remain susceptible to market fluctuations.

A stress test scenario for 2025, assessing the impact of a 20% market downturn, indicates that the average funding level of public pension plans could fall to 61%. This could lead to critical underfunding for many pension plans, raising concerns about their ability to meet future obligations.

Changes in investment strategies

Over the past two decades, investment strategies of public pension funds have shifted notably. Allocations to traditional asset classes, like public equities and fixed income, have decreased while investments in alternative assets, such as private equity, real estate, and hedge funds, have increased. This shift reflects a strategic move for pension systems trying to achieve higher investment returns in a challenging market environment.

By the reported 2023 fiscal year end for each pension system, public pension funds managed approximately $5.05 trillion in assets, with a significant portion now invested in alternative assets such as private equity/credit and hedge funds. While these alternative investments may offer the potential for higher returns, they also introduce greater complexity and risk.

Pension system investment performance: Overly optimistic assumptions, underwhelming returns

Public pension funds have faced challenges meeting their assumed rates of return (ARRs). Over the past 23 years, the average annual return has been 6.5%—well below what plans had assumed. The average assumed rate of return for public pensions has been gradually reduced from 8.0% in 2001 to 6.89% in 2023. Failing to meet their overly optimistic assumed rates of return has contributed to a large increase in unfunded liabilities, requiring additional pension contributions from state and local governments to maintain funding levels.

Investment returns themselves have varied widely, with public pension plans posting solid gains in 2021 (25.3%) contrasted with large losses in 2009 (-13.0%) and 2022 (-5.0%). This volatility between expected and actual returns has created budgetary challenges for employers.

Employer contributions

As unfunded liabilities have grown, the burden on employers—primarily state and local governments—has increased. Employer contributions to public pensions have risen steadily since 2019, driven by the need to address rising amortization costs associated with unfunded liabilities. In contrast, employee contributions have remained relatively stable, placing more financial responsibility on government budgets.

Despite these increasing contributions, many pension plans continue to operate with negative cash flows, where benefit payments exceed contributions. However, some progress in recent years suggests that pension managers are beginning to address these financial challenges more effectively.

Conclusion

Public pension systems face significant challenges as they navigate rising unfunded liabilities, variable investment returns, and increasing financial demands on government budgets. Without meaningful pension reforms and more realistic assumptions about future investment returns, many public pension plans may encounter further financial difficulties in the years ahead.

This report was produced by Reason Foundation’s Pension Integrity Project—an initiative to conduct research and provide consulting and insight about the public pension challenges our nation grapples with.

Full Study: Annual Pension Solvency and Performance Report

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