Articles, Research & Spotlights 

• Model Legislation for Modernized Defined Contribution Retirement Plans 
• Louisiana’s Teacher Pension System Needs Reform, Not a Bailout
• Research Shows Public Employees Are Not Underpaid 
• Time and Politics Can Be a Significant Threat to Pension Reforms

News in Brief
Quotable Quotes
Data Highlight
Reason Foundation in the News
Contact the Pension Reform Help Desk

Articles, Research & Spotlights

Reason’s Model Legislation Provides Framework for Modernized Public Employee Defined-Contribution Plans

Many state and local governments are turning to defined-contribution (DC) plans to expand retirement options for public employees and mitigate the long-term risks that defined-benefit pensions impose on taxpayers. Drawing from years of experience collaborating with policymakers and pension reform successes in several states, the Reason Foundation’s Pension Integrity Project has published a template that lawmakers can use to set up or improve public employee DC plans. Reason’s model includes several cutting-edge features for modernized DC plans, including an emphasis on using DC benefits to secure guaranteed lifetime income for retirees and a focus on concrete income replacement objectives. The template also gives valuable guidance on setting best-practice vesting and contribution policies.

Taxpayers Shouldn’t Bail Out the Teachers’ Retirement System of Louisiana Without Reform

Louisiana lawmakers approved a plan to use $2 billion held in education-related trust funds to pay off some of the $8 billion Teachers’ Retirement System debt. This is expected to significantly reduce annual debt payment costs for school districts, freeing up funds that can be redirected toward permanent teacher pay raises. Passed in the legislature, the plan will now require voter approval in a 2026 ballot. Reason Foundation’s Steven Gassenberger explains that, while the drive to reduce the state’s pension debt is good, lawmakers do a disservice to taxpayers when they do so without actually addressing the source of pension debt. If Louisiana’s teacher plan experiences the same market turbulence that created the $8 billion shortfall to begin with, and no reforms are made, taxpayers will continue to be burdened with runaway costs. 

Public Employees Are Not Underpaid

A widespread assumption exists that government workers, including educators, are paid less than those in similar private-sector roles. This perceived pay gap is frequently cited as a primary reason for difficulties in retaining current government employees and attracting new, skilled individuals. It is often the basis for calling for improved public sector retirement benefits. In this analysis, Reason Foundation’s Mariana Trujillo finds that despite its widespread acceptance, the claim of a compensation disadvantage for public employees is unsubstantiated. In fact, accounting for factors like education, work hours, and benefits suggests that public workers are paid at an equivalent and sometimes better rate than their private sector counterparts.

Important Public Pension Reforms Are Under Threat in Several States

Reforming public pension systems is no small task, but lawmakers are discovering that maintaining these reforms is also challenging. The positive impacts of prudent, cost-saving reforms often take several decades to fully realize. But previously passed pension reforms in California, Washington, Alaska, and New York are encountering significant political challenges from elected officials who were not a part of or may not appreciate the need for the previous reforms aimed at reducing debt and fully funding benefits. Lawmakers need to future-proof public pension reforms, writes Reason Foundation’s Rod Crane, because taxpayers will often see these policies undermined by the next generation of politicians. Crane outlines how today’s lawmakers can convey the intent of much-needed reforms and build guardrails for them.

News in Brief

Do Pensions Influence Late-Career Teacher Effort or Retention? New Evidence from North Carolina

Public pensions are often justified not only as retirement benefits but as tools to retain the most effective educators, particularly in mid- and late-career stages. A new National Bureau of Economic Research working paper tests this hypothesis using administrative data from North Carolina public schools. When teachers become retirement-eligible, their annual pension accruals drop sharply—effectively reducing total compensation—but researchers find no corresponding decline in teacher output, attendance, or student achievement. Likewise, while attrition increases at retirement eligibility, high- and low-value-added teachers exit at similar rates, suggesting pensions do not disproportionately retain more effective educators. The authors conclude that, at least near retirement, the structure of pension accruals does not influence teacher effort or selectively retain higher-quality teachers. Read the full paper here.

Quotable Quotes on Pension Reform

“We were encouraged to see the ongoing trend of improving funding levels and reduced employer contribution rates continue through the 2024 fiscal year. … On average, PSPRS and CORP employer contribution rates are about 30 percent lower than they were five years ago, delivering more than $250 million in annual savings. That kind of progress reflects real, sustained momentum for our pension system.”
—Mike Townsend, Arizona Public Safety Personnel Retirement System administrator, in Arizona PSPRS Third Quarter Newsletter, July 2, 2025.

“However, what happens moving forward is anyone’s guess. … Between tariffs and the big (federal) budget bill, it’s difficult to predict what the consequences from those things would be.”
—Andrew Roth, Colorado Public Employees’ Retirement Association executive director, quoted in “PERA’s funding slips again, but retirees avoid further benefit cuts thanks to investment gains,” Colorado Sun, July 7, 2025.

“[The legislation] restores integrity to the management of retirement plan assets by reinforcing the obligation that ERISA imposes on fiduciaries to manage assets with complete and undivided loyalty to the workers’ financial interests—not their own political or social interests.”
–Rep. Tim Walberg(R-MI) quoted in “House Committee Passes Anti-ESG Bill,” Plan Sponsor Council of America, June 26, 2025

Data Highlight

Reason Foundation’s Mariana Trujillo details the difference in how private and public-sector employees are compensated. On average, government workers have a larger share of retirement benefits, which is essential information in any comparison or conversation on teacher or public employee pay. You can access the complete analysis here.

Reason Foundation in the News

Reason’s Ryan Frost analyzes deferred retirement option plans (DROP) for public safety workers in John Seiler’s Southern California News Group piece, “Despite deficit, California legislators float several costly pension bills.”

The Best of Cato Daily Podcast published a replay of its “The Gathering Storm in State Pensions” episode with former Reason Foundation pension analyst Pete Constant.

The post Pension Reform News: Model legislation for modernized defined contribution retirement plans appeared first on Reason Foundation.

House Bill 473 by Rep. Julie Emerson (R-39) and House Bill 466 by Rep. Josh Carlson (R-43) would, together, execute a three-step plan aimed at producing a permanent pay increase for Louisiana’s public educators. Without any actuarial review, the legislature concluded that the resulting savings to employers would be enough of a budget windfall to fund a permanent teacher pay raise. However, appropriating $2 billion to the Teachers’ Retirement System of Louisiana (TRSL) without addressing the glaring weaknesses that led to a $8 billion growth in pension debt is akin to bailing out a sinking boat without first plugging the hole. 

The well-intended, though misguided, three-step plan is simple, in concept. Step one, as passed in HB 473, is a question lawmakers will put before voters on the April 2026 ballot. If approved on the ballot, HB 473 would dissolve the Louisiana Education Quality Trust Fund, the Louisiana Quality Education Support Fund, and the Education Excellence Fund (EEF). The beginning Fiscal Year 2025 balances in the three funds, according to the Legislative Fiscal Office, totaled nearly $2 billion, with the Quality Fund equaling $1.45 billion, the Support Fund totaling $36.2 million, and EEF being worth $482 million. Step two would be the reallocation of that $2 billion towards TRSL and its $8 billion unfunded liability. Step three, outlined in HB 466, occurs when the sudden influx of cash into the TRSL trust fund triggers a change in the subsequent actuarially determined annual employer contribution rate. HB 466 ensures employers use funds freed by the resulting rate reduction to fund permanent pay raises. 

In 2023, over half of all funds contributed towards TRSL–15.71% of the required 28.82% contribution–went towards paying down unfunded liabilities, rather than funding teacher benefits. If the voters approve HB 473 in April and the three-step plan is implemented, the 15.17% figure will be reduced to around 12%, resulting in a cost reduction of approximately 3% for hiring new educators in Louisiana. However, those cost savings are unlikely to materialize when the vast majority of the employer rate goes to servicing past debt. This is because contribution rates change annually based on investment returns. This issue was raised indirectly by the legislative auditor’s office in their fiscal note on HB 473 when they warned that the legislation’s “actual impacts will not be known until the time the funds are fully liquidated, their balances transferred to TRSL, and the retirement contribution rate of TRSL is re-amortized.”

Indeed, a $2 billion supplemental contribution to the TRSL fund is expected to immediately lower the required employer contribution rate by about 3% and improve the system’s funded ratio by about 8%. The multi-billion dollar question is, what happens the next time investments underperform actuarial assumptions?

The answer isn’t complicated—but it is costly. The shortfall becomes new pension debt, stretched over 30 years, which means a larger unfunded liability and higher employer contribution rates the very next year. Even a basic economic stress test of TRSL makes clear just how fragile the system becomes under market pressure.

Only by coupling the three-step plan proposed in HB 466 and HB 473 with a modernized TRSL tier for new hires can lawmakers confidently say Louisiana provides sustainable benefits without burdening future generations of taxpayers. All active and retired members of TRSL should feel confident that their retirement benefits are constitutionally protected and guaranteed. That doesn’t mean the state should be relegated to legislative budgeting with a perpetual albatross around its fiscal neck. Other benefit designs that include guaranteed lifetime income and inflation protection options, while better managing risk, could be considered.

Voters will decide in April 2026 if they want to dedicate another $2 billion towards the $8 billion TRSL debt and execute the legislature’s misguided plan for a permanent teacher pay raise. In the meantime, liberal actuarial assumptions, unsuitable benefits, high costs, and limited transparency remain well-known issues with TRSL that lawmakers should address in the next session. Without systemic reform, the extra funding could disappear, and lawmakers will continue to expose taxpayers to cost overruns, thereby preventing the much-needed modernization of retirement benefits for today’s increasingly diverse and mobile public education workforce. This is precisely why Gov. Jeff Landry must reject injecting more taxpayer funds into a structurally unsound system via HB 466 and instead reform the TRSL benefit for new hires. 

The post Taxpayers shouldn’t bail out the Teachers’ Retirement System of Louisiana without reform appeared first on Reason Foundation.

Articles, Research & Spotlights 

• Michigan Legislature Pushes to Undo Pension Reform
• Webinar on 2024 Public Pension Debt, Trends
• Mississippi’s Public Plan Needs More Options
• Pennsylvania Considers Granting Costly COLA Benefits
• Louisiana Directs Funds to Teacher Pension without Fixing Source of Underfunding 

News in Brief
Quotable Quotes on Pension Reform
Reason Foundation in the News
Data Highlight
Contact the Pension Reform Help Desk

Articles, Research & Spotlights

On Their Way Out of House Control, Michigan Democrats Seek to Undo Several Crucial Public Pension Reforms

As a result of the November election, control of the Michigan House of Representatives will soon flip from Democrats to Republicans, leaving just one more week for Democrats to pass legislation using their trifecta majority advantage. Democrats will still control the state senate, and Democratic Gov. Gretchen Whitmer will remain in office. On their way out, some members of the House Democratic caucus are targeting past major reforms to the state’s public pensions, seeking to undo policies that have been crucial to controlling runaway costs. 

Last week, the Michigan House unanimously passed House Bill 6060 without granting any opportunity for testimony or cost analysis, leaving the legislation up for consideration in the Senate. The bill would roll back a landmark 2017 pension reform of the Michigan Public School Employees’ Retirement System, which established risk-balanced options (a hybrid pension plan or a defined contribution plan) for new hires. The proposed legislation would remove the crucial cost-sharing function of the past reform, transferring colossal costs from the employee to the employer. Reason Foundation’s actuarial evaluation of this bill indicates that this could cost employers (and, therefore, taxpayers) up to $20 billion over the next 30 years. Another set of bills—Senate Bills 165-167—would move a group of existing employees from a defined contribution plan to one of the state’s existing hybrid pension plans, but the full cost of this has received almost no consideration. Before placing massive costs and risk burdens on the state and its taxpayers, legislators need to evaluate the actuarial impact of reversing course on previous reforms.
Testimony on HB 6060
Testimony on SB 165-167

Webinar: 2024 Public Pension Solvency and Performance Report

Reason Foundation’s Pension Integrity Project recently published our annual Public Pension Solvency and Performance Report, which shares a unique analysis of the funding and investment outcomes of 296 public pension plans sponsored by state and local governments. In a webinar this month, Reason Foundation’s Ryan Frost and Mariana Trujillo showcased key findings, trends, and the report’s tools and interactive capabilities, which allow anyone to see the funding history of every pension plan and funding estimates for 2025. The analysis also shows how nearly all public pension systems fell short of investment targets over the last two decades, driving up unfunded liabilities and, consequently, annual costs.
Webinar: Key trends and findings on public pensions
Public pension solvency and performance report
Analysis: Pension fund size doesn’t improve investment performance

Reforms That Could Fix Mississippi’s Public Pension

With Mississippi’s pension debt ballooning to $25.5 billion, only 56% of assets needed to fulfill promises, and expected annual costs on the rise, the Mississippi Public Employee Retirement System, PERS, is in dire need of a new approach to providing and paying for public pension benefits. In a multi-part series in the Magnolia Tribune, Reason Foundation has laid out the challenges policymakers face in the state, as well as some solutions that could improve the solvency and cost of the system. Using actuarial modeling of the plan, it’s clear that a new tier of benefits for new hires—one that better balances risks and costs—would help dig PERS out of its funding shortfalls and save taxpayers billions in the long run.
Modernizing PERS to serve Mississippi’s public workforce
Modernizing PERS (Part 2): The state of play after the 2024 legislative session
Mississippi municipalities should brace for higher public pension contributions
A new and necessary approach for Mississippi’s public pensions

Pennsylvania’s Proposed Public Pension Increases Would Be Costly to Taxpayers

Pennsylvania’s two main public pension systems, the Public School Employees’ Retirement System and the State Employees’ Retirement System, are a combined $61 billion underfunded. Despite that, state lawmakers are considering granting unfunded cost-of-living adjustments to retired teachers and public workers. Reason Foundation’s Rod Crane explains how the one-time benefit boost will add about $1.19 billion in liabilities, which is expected to add to already growing annual employer costs. Rather than passing these costs on to future budgets and taxpayers, Pennsylvania policymakers should fund these new benefits upfront.

Louisiana Legislature Wants to Use Education-Related Funds to Pay for Teacher Pensions Without Fixing Core Problem

The Louisiana state legislature approved a proposal to direct $2 billion from education-related funds to help pay down the $8.5 billion debt owed by the state’s teacher pension. Reason Foundation’s Steven Gassenberger explains that, while this will certainly have a positive impact on the funding of the pension, doing so without addressing the underlying cause of the debt does teachers and taxpayers a disservice. Reason Foundation’s modeling of the system shows that the cash infusion does not protect the teacher plan from falling short of lofty investment return expectations, which remain above national averages.

News in Brief

Making public pensions part of ERISA could straighten fiduciary obligations

A recent DePaul University Law Review article argues that the exemption of public pension plans from the Employee Retirement Income Security Act (ERISA) is no longer justifiable given their widespread underfunding and ongoing issues with mismanagement, lack of transparency, and conflicts of interest. Author Gurkaran Singh Bhatti argues bringing public pensions under ERISA would impose minimum funding standards, fiduciary duties, and transparency requirements, reducing administrative risks and protecting retirees and taxpayers from financial mismanagement. The full article can be found here.

Underfunded pensions and politically appointed boards take more risk with private equity but don’t achieve higher returns 

 A National Bureau of Economic Research working paper finds that underfunded pension plans, particularly those with boards dominated by state officials/politically appointed members, tend to take on more risk in private equity investments. Despite their increasing reliance on alternative investments to adequately grow their assets, these pensions underperformed public equity markets when adjusted for risk. The authors believe this suggests that political or governance factors may drive these decisions, as underfunded plans might be more likely to pursue risky investments to recover from financial shortfalls, rather than making sound investment choices—a practice referred to as “gambling for resurrection.” The full working paper can be found here.

Quotable Quotes on Pension Reform

“But right now we don’t send any good signals to the public, we don’t send any good signals to the rest of the country as far as us being an economic growth engine because we refuse to touch pensions.”
— Ted Dabrowski, Wirepoints President (Illinois research group), quoted in “Illinois’ pension debt grows,” The Center Square, Dec.12, 2024. 

“She [Rep. Debbie Lesko (R-Arizona)] worked on the pension reform […] and anyone who ever done it knows it’s one ugly thing, and it takes a lot of courage.”
— U.S. Rep. Andy Biggs (R-Arizona),  quoted in Rep. Lesko’s farewell address in the House, Dec. 5, 2024. 

“Missouri pension systems funds should never be used to make contributions to political campaigns.”
— Missouri state Rep. Dirk Deaton (R-Noel), quoted in “Missouri state pension board bans use of fund for political donations” Missouri Independent, Nov. 21, 2024.

Reason Foundation in the News

“The pension debt was caused by poor and risky investment decisions, not by shrinking hours or a growing retired population.”
— Zachary Christensen, Pension Integrity Project Managing Director, quoted in “Federal bailout gives $635 million to carpenters union pension plan” CapCon, Nov. 22, 2024. 

Actuarial analysis by Reason Foundation and Yankee Institute was cited in a National Review article on the value of Connecticut’s “fiscal guardrails.”
— “Connecticut’s Fiscal Death Wish,” National Review, Dec. 9, 2024.

Data Highlight

Each month, we feature a pension-related chart or infographic created by our team of analysts. This month, we highlight Mariana Trujillo’s analysis of how the fiscal year-end month affects public pension fund returns. Short-term investment returns can vary significantly depending on when a fund closes its books due to market volatility. Read the full analysis here.

The post Pension Reform News: Michigan legislature pushes to undo pension reforms appeared first on Reason Foundation.

While the $2 billion infusion contained in Louisiana House Bill 7 (H.B. 7), which passed and was sent to the governor, may seem appealing on the surface, actuarial modeling suggests that any pension investment underperformance in the short to medium term would erase the expected employer contribution savings and make the pension system worse off unless such a move were paired with meaningful reforms. 

Currently reporting $8.5 billion in debt, the Teachers’ Retirement System of Louisiana (TRSL) is clearly in dire need of more money to generate the investment returns needed to fully fund benefits and protect retirees from inflation over the long term. The goal underlying this accounting move is the assumption that the $2 billion worth of debt that gets erased by H.B. 7 will provide local employers with a lower contribution requirement. According to the guidelines established in Louisiana House Bill 5 (H.B. 5, which was also passed and sent to the governor), the difference will be used for educator pay raises. In the end, the effect is a taxpayer-funded supplemental contribution that will immediately lower the employer’s contribution rate. Still, this move comes with a tradeoff—it undermines the financial resilience of Louisiana’s largest public pension system.  

Contributing more taxpayer money without addressing the root causes of the state’s multi-billion-dollar pension problem is akin to attempting to bail out a leaking boat without first fixing the hole. According to TRSL modeling done by the Pension Integrity Project at Reason Foundation, any negative market performance in the short to medium term will likely erase the employer contribution savings expected by H.B. 7 and its $2 billion taxpayer supplemental payment. 

A great way to visualize how little progress H.B. 7 alone will make in resolving the state’s oldest and most expensive debt is by looking at the legislation’s impact on TRSL over the next 30 years in both ideal and underperforming markets.  

Figure 1 below, generated by Reason Foundation’s modeling of TRSL, shows how the $2 billion supplemental payment to the Teachers’ Retirement System of Louisiana is expected to increase the funded ratio, or percentage of funds on hand, versus what’s expected, from 77.2% to 82.8%. But, because the bill does nothing to address the actual source of the system’s growing debt, the pension system will remain vulnerable to market outcomes.

For example, TRSL continues to operate under a return assumption that is above the national average. Until policymakers adopt safer assumptions, the probability of experiencing more unfunded liabilities remains high. 

Figure 1: The Impact of House Bill 7 on the Teachers’ Retirement System‘s Funding 

According to the 2024 TRSL valuation, for the year ending June 30, 2024, the system’s actuarial rate of return of 7.01% was less than the 7.25% expectation, resulting in a new $63,905,843 unfunded liability that will be amortized over 20 years. While the $2 billion from HB 7 does help the system recover from this and previous market-driven funding shortfalls, it does not address the glaring vulnerability to returns below the system’s lofty investment assumption.  

The core shortcoming of H.B. 7 is its disregard for the effective way the Teachers’ Retirement System of Louisiana currently responds to investment underperformance. Although not cheap to employers and taxpayers currently, TRSL employers are committed to funding their constitutionally protected public pension benefits according to what system actuaries determine is needed year to year—also referenced to as the actuarially determined contribution rate (ADEC). The rate adjustments are automatic under the current ADEC policy and used by employers and the state to fund TRSL benefits. Employers see their required contributions rise and fall from year to year according to the system’s needs.  

Figure 2 shows how House Bill 7 will allow for a lower employer rate compared to the status quo. However, these rates, even with the $2 billion applied, will necessarily rise well above current levels if the system were to experience a recession. Maintaining an above-average investment assumption under House Bill 5 and its plan to reallocate the Teachers’ Retirement System of Louisiana’s employer contributions to pay raises will only exasperate TRSL vulnerabilities and likely lead to local employer rates increasing when investments underperform. A good way to visualize that aspect of the legislation is by forecasting the employer contribution rate under underperforming conditions.  

Figure 2: The Impact of House Bill 7 on TRSL Employer Contribution Rates 

The supplemental payment established in House Bill 7 clearly reduces annual costs in the short term, which policymakers hope to use—through House Bill 5—to increase teacher salaries. The problem with this approach is that any dip in the market will squeeze local school districts and property taxpayers on both the employee and employer sides. When investments underperform, taxpayers will be left 100% financially responsible. 

There is no question that an extra $2 billion contribution to a public pension system that is $8.5 billion in debt is going to have an immediate, clear, and positive impact on the health and status of the system. However, policymakers, stakeholders, and taxpayers should be aware of the strategic mistake it will be to not address the systemic issues that created the $8.5 billion TRSL debt and its current sky-high cost.

Figure 3 illustrates how ineffective $2 billion alone will be if TRSL continues to underperform. If the system experiences a single recession in the short- to medium-term, H.B. 7 could increase costs, remove any prospects for a future cost-of-living increase for retirees, and prevent the state and the system from making any meaningful progress on improving the teacher pension’s funding over 30 years. 

The Teachers’ Retirement System of Louisiana could realistically be just as underfunded in 2055 as it is today. 

Figure 3: TRSL Unfunded Liability (Market Value) 

Simply injecting public funds into any of the state’s multi-billion-dollar indebted pension systems alone isn’t a good idea for taxpayers on its own terms unless it actually buys better than slightly less cost for a few years. Rerouting any funds away from servicing a billion-dollar debt will result in the proverbial can being kicked down the road. That’s what the modeling shows as the most likely scenario for TRSL and its participating school districts. 

All the most successful state pension reforms in the United States started with fixing the broken pension and then increasing spending to service what is usually every state’s most expensive debt. Successful, sustainable, and resilient pension reform has an order of operations, and Louisiana lawmakers should be aware that H.B. 7 and H.B. 5 do not currently represent the best process to achieve a long-term resolution to the state’s long-term public pension problem.

The post Louisiana legislature wants to use education-related funds to pay for teacher pensions without fixing core problem  appeared first on Reason Foundation.

The interactive map below shows the funded ratios for state-managed public pension systems from 2001 to 2022. A funded ratio is calculated by dividing the value of a pension plan’s assets by the projected amount needed to cover the retirement benefits already promised to workers. The funded ratio values for 2022 are projections based on a -6% investment return. 

Year-to-year changes in investment returns and funded ratios tend to grab attention, but longer-range trends give a better perspective of the overall health of public pension systems.

In 2001, only one state, West Virginia, had an aggregated funded ratio of less than 60%. By the end of 2021, four states—Illinois, Kentucky, New Jersey, and Connecticut—had aggregate funded ratios below 60%.

If investment returns are -6% or worse in the 2022 fiscal year, Reason Foundation’s analysis shows South Carolina would be the fifth state with a funded ratio below 60%. 

Over the same period, 2001 to 2021, the number of states with state-managed pensions with funded ratios above 90% fell from 33 to 20. If all plans return a -6% investment return assumption for 2022, Reason Foundation projects the number of states that have funded levels above 90% would shrink from 20 to six.  The six states with funded levels that would still be above 90% after -6% returns for 2022: Delaware, Nebraska, New York, South Dakota, Washington, and Wisconsin. 

Importantly, the -6% investment return assumption for the 2022 fiscal year used in this map may be too optimistic for some public pension plans. The S&P 500 lost 12% of its value over the 2022 fiscal year from July 1, 2021, to June 30, 2022. Vanguard’s VBIAX, which mimics a typical 60/40 stock-bond portfolio, was down 15% for the fiscal 2022 year ending in June 30, 2022. Thus, given the condition of financial markets this year, the public pension plans with fiscal years that ended in June 2022 are likely to report negative returns for the 2022 fiscal year.  

Another useful long-term trend to look at are the unfunded liabilities of state-run pension plans. Whereas a pension system’s funded ratio takes the ratio of assets to liabilities, unfunded liabilities are the actual difference between the pension plan’s assets and liabilities. Unfunded liabilities can be conceptualized as the pension benefits already promised to workers that are not currently funded by the plan. Again, the values for the 2022 unfunded liabilities map are a projection using an investment return of -6%. 

The five states with the largest unfunded liabilities are California, Illinois, New Jersey, Pennsylvania, and Texas. In fiscal year 2021, the unfunded liabilities of those states totaled $434 billion and would jump to $620 billion in 2022 with a -6% return.  

For more information on the unfunded liabilities and funded ratios of state-run pensions, please visit Reason’s 2022 Public Pension Forecaster.

Notes

ⁱ The state-funded ratios in this map were generated by aggregating (for state-managed plans) the market value of plan assets and actuarially accrued liabilities. Prior to 2002, Montana and North Carolina reported data every two years, therefore for 2001 figures from 2002 are used. Figures for Washington state do not include Plan 1, an older plan that is not as well funded.

ⁱⁱ The discount rate applied to plan liabilities will impact the funded ratio of a plan. Therefore, the map above can be best thought of as a snapshot of state-funded ratios based on plan assumptions by year. Overly optimistic assumptions about a pension plan’s investment returns will result in artificially high-funded states. Conversely, pulling assumptions downward, while prudent, will result in a worse-looking funded ratio over the short term.

ⁱⁱⁱ In addition to projections for fiscal 2022, some public pension plans in 29 states have yet to report their complete fiscal 2021 figures and therefore include a projection estimate for 2021 as well. Thus, 2021 projections were used for at least one plan in the following states: Alabama, Alaska, Arkansas, California, Colorado, Georgia, Hawaii, Illinois, Kansas, Louisiana, Massachusetts, Michigan, Missouri, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, Texas, Tennessee, Utah, Virginia, Washington, West Virginia, Wisconsin, and Wyoming.

The post Projecting the funded ratios of state-managed pension plans appeared first on Reason Foundation.

Based on a -6% return for fiscal 2022, the aggregate unfunded liability of state-run public pension plans will be $1.3 trillion, up from $783 billion in 2021, the Pension Integrity Project finds. With a -6% return in 2022, the aggregate funded ratio for these state pension plans would fall from 85% funded in 2021 to 75% funded in 2022. 

The 2022 Public Pension Forecaster below allows you to preview changes in public pension system funding measurements for major state-run pension plans. It allows you to select any potential 2022 investment return rate to see how the returns would impact the unfunded liabilities and funded status of these state pension plans on a market value of assets basis.

The nation’s largest public pension system, the California Public Employees’ Retirement System (CalPERS), provides a good example of how much one bad year of investment returns can significantly impact unfunded liabilities, public employees, and taxpayers.

If CalPERS’ investment returns come in at -6% for 2022, the system’s unfunded liabilities will increase from $101 billion in 2021 to $159 billion in 2022, a debt that would equal $4,057 for every Californian. Its funded ratio will drop from 82.5% in 2021 to 73.6% in 2022, meaning state employers will have less than three-quarters of the assets needed to pay for pensions already promised to workers. 

Similarly, the Teacher Retirement System of Texas (TRS) reported $26 billion in unfunded liabilities in 2021. If TRS posts annual returns of -6% for the fiscal year 2022, its unfunded liabilities will jump to $40 billion, and its funded ratio will drop to 83.4%. The unfunded liability per capita is estimated to be $1,338. 

The table below displays the estimated unfunded liabilities and the funded ratios for each state if their public pension systems report -6% or -12% returns for 2022. 

Estimated Changes to State Pension Unfunded Liabilties, Funded Ratios

The first three quarters of the 2022 fiscal year clocked in at 0%, 3.2%, and -3.4% for public pensions, according to Milliman. The S&P 500 is down more than 20% since January, suggesting that the fourth quarter results will be more bad news for pension investments.

Considering the average pension plan bases its ability to fund promised benefits on averaging 7% annual investment returns over the long term, plan managers are preparing for significant growth in unfunded liabilities, and a major step back in funding from 2021. 

The significant levels of volatility and funding challenges pension plans are experiencing right now support the Pension Integrity Project’s position last year that most state and local government pensions are still in need of reform, despite the strong investment returns and funding improvements in 2021. Unfortunately, many observers mistook a single good year of returns—granted a historic one—as a sign of stabilization in what was a bumpy couple of decades for public pension funding. On the contrary, this year’s returns, as well as the growing signs of a possible recession, lend credence to the belief that public pension systems should lower their return expectations and view investment markets as less predictable and more volatile. 

State pension plans, in aggregate, have struggled to reduce unfunded liabilities to below $1 trillion ever since the Great Recession, seeing this number climb to nearly $1.4 trillion in 2020. Great results from 2021 seemed to finally break this barrier, with the year’s historically positive investment returns reducing state pension debt to about $783 billion. Now, state-run pension plans will again see unfunded liabilities jump back over $1 trillion, assuming final 2022 results end up at or below 0%. 

It is important not to read too much into one year of investment results when it comes to long-term investing. But during this time of economic volatility, policymakers and stakeholders should recognize that many of the problems that kept public pension systems significantly underfunded for multiple decades still exist. And many pension plans are nearly as vulnerable to financial shocks as they were in the past.

Going forward, state and local leaders should continue to seek out ways to address and minimize these risks, making their public retirement systems more resilient to an uncertain future. 

Webinar on using the 2022 Public Pension Forecaster:

The post Unfunded public pension liabilities are forecast to rise to $1.3 trillion in 2022 appeared first on Reason Foundation.

In This Issue:

Articles, Research & Spotlights 

• Louisiana’s Hybrid Pension Proposal Falls Short
• Shortcomings of ESG Scores
• A Chance for New Hampshire to Reduce Pension Debt
• Texas Needs to Reform Teacher Pensions
• Past Pension Missteps Should Be a Warning to California

News in Brief
Quotable Quotes on Pension Reform
Data Highlight
Contact the Pension Reform Help Desk

Articles, Research & Spotlights

Evaluating the Potential Impacts of Louisiana Senate Bill 438 

Recognizing the need to better accommodate an increasingly mobile workforce, Louisiana legislators are considering a proposal to create a hybrid pension plan for new workers in the Louisiana State Employees’ Retirement System (LASERS). Senate Bill 438 would place all new hires into a plan that combines a risk-reducing individual investment account with a defined benefit pension structure. Despite the bill’s intentions, Reason’s analysis and testimony find that the structure of the new plan would offer little risk mitigation, add costs, and be a poor fit for the modern worker. 

The Difficulties of Assigning ESG Ratings

Despite concerns with fiduciary priorities, an increasing number of public pension plans are applying environmental, social, and corporate governance (ESG) policies to their investment strategies. A major part of this trend is the emergence of ESG ratings that attempt to quantify the environmental impact of companies. In an examination of this scoring, Reason’s Jordan Campbell finds companies with a higher market capitalization tend to receive better ratings, raising some questions about the validity of ESG scoring. Do bigger companies truly have a lower impact on the environment, or are they just better equipped to comply with demanding reporting requirements?

Why Paying Down New Hampshire Pension Debt Faster Would Be a Win for Taxpayers 

New Hampshire’s state government holds over $800 million in unfunded pension obligations to public workers and retirees, but lawmakers have an opportunity to significantly reduce this costly debt. With state government revenues currently $382 million above expectations, policymakers should consider using this surplus to close the funding gap of its retirement system to reduce long-term costs and risks to taxpayers. The Pension Integrity Project’s new one-page explainer outlines the benefits of paying down New Hampshire’s pension debt sooner rather than later.

Teacher Retirement System of Texas Can Improve Funding Policies and Plan Design to Benefit Taxpayers, Employees 

Texas policymakers have adopted several major reforms to improve funding and reduce runaway costs associated with the state’s pension plans in recent years. Most notably, 2021 legislation adopted an improved funding policy and established a risk-managed retirement plan for all new workers in the Employee Retirement System (ERS). Now, as Reason’s Steven Gassenberger testified to the State Senate Committee on Finance, Texas policymakers need to make similar reforms to the Teacher Retirement System (TRS), which is still chronically underfunded and remains very vulnerable to overly optimistic market assumptions. TRS benefit offerings also need to expand to better serve the mobile nature of educators today.

California Should Learn from Past Mistakes Made with Unfunded Pension Benefit Increases 

California Senate Bill 868 would increase pension benefits for teachers who retired over 20 years ago. The bill aims to counteract the degrading effects that inflation has had on retirees’ pension benefits, but as Reason’s Marc Joffe warns, this benefit increase would come with a high price tag. The pension plan’s actuaries indicate that the move would cost the state $592 million, but this estimation could be too low because it depends on the plan achieving optimistic returns over the next few decades. The proposal would also add to California’s unfortunate history of giving out pension benefit increases without properly funding them, which has generated significant unexpected costs to public employers and taxpayers.

News in Brief

Forensic Analysis of Pension Funding: A tool for Policymakers

A new study conducted by Boston College’s Center for Retirement Research (CRR) looks at the role legacy debt plays in the solvency of pension plans in Illinois, Massachusetts, Pennsylvania, Ohio, and Rhode Island. The inception of many public pensions occurred in the early to mid 1900s and there were not the same established norms in funding practices that we see today. Many pension plans had a “pay-go” system where the funding for benefits was not saved in advance. Even those that used an actuarial funding method approached unfunded liabilities very differently, not always including legacy debt as part of the calculation for required contributions. These old funding policies, combined with underperforming investment returns and benefit increases during the 1980s and 1990s, have resulted in several plans holding significant unfunded liabilities that accrued more than half a century ago. On average, CRR reports that legacy debt is 40% of total unfunded liabilities for the five focus states, with some as high as 74% in the case of Ohio. The full brief is available here.

Quotable Quotes on Pension Reform 

“We have a lot of counties and cities that are struggling right now with inflationary costs, and every time the plan doesn’t perform, they have to put in more money.”

— North Carolina Treasurer Dale Folwell in “Pensions’ Bad Year Poised to Get Worse,” The Wall Street Journal, May 10, 2022

“Ultimately at a fiduciary level, if a pension fund’s total worst-case exposure to all earnings and income derived from autocratic nations is an insignificant fraction of its total portfolio, the composite risk is probably not worth losing sleep over, on purely financial grounds. But politics could still enter the theater stage for pension boards that ignore this issue”

– Former GASB board member and ICMA Retirement Corp. President Girard Miller in “Public Pensions’ New Quandary: Coping With Geopolitical Turmoil,” Governing, May 10, 2022

Data Highlight

Each month we feature a pension-related chart or infographic of interest generated by our team of Pension Integrity Project analysts. This month, analyst Jordan Campbell created a visualization of ESG risk ratings for the nation’s largest companies, showing the difference between the S&P 500 and the Russel 2000. 

Contact the Pension Reform Help Desk

Reason Foundation’s Pension Reform Help Desk provides information on Reason’s work on pension reform and resources for those wishing to pursue pension reform in their states, counties, and cities. Feel free to contact the Reason Pension Reform Help Desk by e-mail at pensionhelpdesk@reason.org. 

Follow the discussion on pensions and other governmental reforms at Reason Foundation’s website and on Twitter @ReasonPensions. As we continually strive to improve the publication, please feel free to send your questions, comments, and suggestions to zachary.christensen@reason.org.

The post Pension Reform News: Hybrid pension proposal falls short in Louisiana, shortcomings of ESG scores, and more appeared first on Reason Foundation.

A version of this testimony was given to the Louisiana Senate Committee on Retirement on April 25, 2022.

Thank you for the opportunity to share our project’s perspective on Senate Bill 438 (SB 438) and the proposed new hybrid retirement benefit under the Louisiana State Employees’ Retirement System (LASERS). 

My name is Ryan Frost, and I serve as a policy analyst for the Pension Integrity Project at Reason Foundation. Prior to joining Reason, I spent seven years as the research and policy manager for the Law Enforcement Officers and Firefighters Pension System in Washington state. Our team has engaged stakeholders in Louisiana dating back to 2016, offering quantitative research and pro-bono technical assistance to advance retirement security for public servants in a financially responsible way.  

Proposing an alternative benefit design to offer new public employees is commendable because even after the historic investment returns in 2021, LASERS is still only 66% funded with $6.8 billion in unfunded pension obligations. Although current amortization schedules are set to retire some of that debt, market forecasters also expect returns to be less than what LASERS actuaries assume across all asset classes. Lower returns would increase the probability of more unfunded liabilities in the near future.  

LASERS’ financial health aside, the plan’s current benefit structure is grossly inadequate for most public employees. Only 2.5% of new hires joining LASERS at age 35 will stay in the system long enough to accrue a full retirement benefit. Seventy percent of LASERS members leave with only their employee contributions to return to them (without interest). The current LASERS benefit is simply not designed for the modern public employee. These increasingly mobile employees are being penalized in Louisiana when leaving public employment. 

While previous attempts to implement a hybrid LASERS benefit—most notably back in 2018 under Senate Bill 14—would have addressed these issues, this current proposal includes changes that would likely prevent the state and taxpayers from seeing any meaningful cost reduction or financial risk reduction. 

Reason Foundation found that the use of a 1.8% multiplier (as outlined under the guaranteed benefit portion of the bill) would make LASERS an extreme outlier among hybrid plans. For example, the State Teachers Retirement System of Ohio whose members, like LASERS members, do not pay into Social Security operates using a 1% multiplier. Hybrid defined benefit (DB) and defined contribution (DC) designs typically use a 1.0%-1.25% multiplier for the guaranteed benefit and a more prominent defined contribution portion to broaden the number of members served by the plan. 

Another feature of this proposed plan that would be less than ideal for employees is the stipulation that hybrid members must annuitize their DC balances within LASERS. If a member separates from service for any reason (including retirement) and they want to withdraw their DC money in a lump sum, they are forced to also withdraw their DB contributions and forfeit any accrued pension benefit. They forfeit that benefit and all employer contributions made to the DB as well while gaining zero interest on any contributions made to the DB. 

No other hybrid plan has this stipulation. For a typical hybrid plan, if a member separates mid-career, they can take their DC money with them and leave their DB account alone. If a member separates at retirement–no matter what they choose to do with their DC balance–they may either receive their accrued pension or take a refund of all DB contributions (both employer and employee contributions plus interest). 

Adding this anomalous stipulation unduly jeopardizes members’ retirement security. Employees should be allowed to keep their DB benefit intact even if they withdraw their defined contribution benefit. In the end, the guaranteed benefit portion of the proposed hybrid plan slightly increases benefits for new hires while maintaining the same cost and risk challenges that led to LASERS’ current funding issues.  

While a new hybrid design for LASERS members could be a prudent step forward, Senate Bill 438, as currently drafted, lacks the risk and cost-saving mechanisms of other better-designed hybrid plans.  We commend legislators, members, and stakeholders willing to examine these important public pension issues and thank you again for the opportunity to share our perspective. 

The post Testimony: Louisiana Senate Bill 438 could cause public pension woes appeared first on Reason Foundation.

The post Evaluating the potential impacts of Louisiana Senate Bill 438 appeared first on Reason Foundation.

In this Issue:

Articles, Research & Spotlights 

• Alaska Needs to Answer Questions Before Jumping Back Into Defined Benefits
• Bills in Louisiana Would Weaken Public Retirement Systems
• Public Pension Investments Shouldn’t Be Guided by Politics
• New Reporting Standard Will Bring Valuable Perspective to Public Pensions
• Kansas Considers a Defined Contribution Plan

News in Brief
Quotable Quotes on Pension Reform
Data Highlight
Contact the Pension Reform Help Desk

Articles, Research & Spotlights

Legislation Would Introduce Costs and Risks to Alaska Retirement System

After 15 years of new workers going into a defined contribution plan, Alaskan lawmakers are considering legislation that would change course. Alaska House Bill 55 would place all peace officers and firefighters into a new tier in the historically underfunded defined benefit plan. The potential reform has not undergone any sort of risk-focused, long-term actuarial analysis, but comments from the plan’s consulting actuary suggest that the move would expose the state to adverse funding and increased contribution rates. Reason Foundation’s Leonard Gilroy and Ryan Frost summarize what limited comments have emerged on the potential risks of House Bill 55 and list several questions that legislators should ask when considering such a significant policy shift. Chiefly among those questions is, What happens if the plan achieves investment returns below its lofty 7.38% return rate assumption?

Bills Under Consideration in Louisiana Would Increase, Not Decrease, Future Risks

Louisiana’s state legislature is currently considering several bills that would affect the state’s retirement systems, and the Pension Integrity Project has testified on several of these proposals before the Senate Committee on Retirement. Senate Bill 438 would establish a hybrid plan for the Louisiana State Employees’ Retirement System (LASERS), which would improve the accrual and portability of benefits for the majority of new hires. Three bills—Senate Bill 5, Senate Bill 6, and Senate Bill 7—seek to give out benefit adjustments for retirees, but involve funding policies that would weaken the state’s ability to manage unexpected costs in the future. Senate Bill 10 would allow current teachers who already made the choice to participate in the state’s defined contribution plan the option of changing their selection and entering the defined benefit pension. As Reason Foundation explains in this backgrounder, this move would do a disservice to Louisiana teachers and would weaken their already underfunded retirement system. 

Keeping Politics Out of Public Pension Investing

A growing trend in the sphere of public pensions is the push to use the trillions of dollars in pension assets, funded through taxpayer and member contributions, to support social and political interests. In this one-page backgrounder, Reason explains the problems with this politicized approach and why allowing objectives beyond a pension plan’s fiduciary responsibility reinforces risky behavior that can hurt the pension system, workers and taxpayers. This type of politicized investment policy also introduces several technical and unnecessary challenges for plan managers.

A Chance to Enter a New Era of Financial Transparency and Awareness for Public Pension Plans

The Actuarial Standards Board has issued a change to a previously adopted standard of practice (ASOP 4) that will now require public pension plans to report their obligations using alternate discounting. While plans will continue to report their liabilities using their current discounting methods, they will now also report these figures using discounting that is more appropriate for obligations that are backed by governments. Guest actuary commentator Larry Pollack explains that this new standard will provide a valuable perspective for understanding pension promises made and the risks involved in funding them.

Testimony: Assessing the Proposed Kansas Thrift Savings Plan

In the current legislative session, Kansas lawmakers are considering Senate Bill 553, which would establish a new defined contribution (DC) plan fashioned after the federal Thrift Savings Plan. The Pension Integrity Project at Reason Foundation testified before the Kansas Senate Committee on Assessment and Taxation on the legislation, offering its evaluation of the proposed DC plan. The assessment, which uses experience with similar plans around the country, indicates that the DC plan introduced in SB 553 would reflect best practices with adequate contributions, funding policies that would not take away from the existing pension, stated objectives, and options to provide lifetime income.

News in Brief

Analysis Finds Many Employers Fail to Adequately Replace Social Security Benefits

Most public pensions work in combination with Social Security, but some employers exercise the option to opt-out of the federal program, meaning they should compensate accordingly with higher contributions. A new report from the Center for Retirement Research at Boston College looks at whether state and local employees who are not covered by Social Security are receiving an equivalent benefit from their retirement plan. About five million state and local workers are not covered by Social Security, and 43% of those have lifetime benefits that fall short of what Social Security would have provided. The study does note that the difference between benefits does vary depending on years of service and those that leave mid-career suffer the greatest discrepancy. About one-third of non-covered workers fall into this tenure range of mid-career, which is between six-and-20 years of service. The full brief is available here.

Updated Brief Highlights Continued Reductions in Return Assumptions for Public Pensions

The National Association of State Retirement Administrators (NASRA) has released its latest brief on public pension plans’ assumed rates of return. They note that the two-decade trend in return assumption reductions is likely to continue. In 2018, the average assumed rate of return for a pension plan was 7.33%. By 2021 the assumed rate had dropped to 7%, with some states going even lower. The main driver of this trend is the declining interest rate environment after the 2008-09 recession, which caused returns for safer assets like treasuries to drop substantially. The brief notes short-term market forecasts are suggesting the next decade will likely render returns below historic averages, meaning plans will either face cost increases now through further reductions in assumptions or later through market experience coming in below expectations. The full brief is available here.

Quotable Quotes on Pension Reform 

“State pensions often have an allocation to equities that is greater than the size of [the states’] annual budgets, so a correction in equity prices can ultimately have an outsize impact on the state.” 

—Municipal Market Analytics partner Matt Fabian, cited in “U.S. Retirement Funds, Heavy on Stocks, Brace for Losses,” The Wall Street Journal, March 7, 2022

Contact the Pension Reform Help Desk

Reason Foundation’s Pension Reform Help Desk provides information on Reason’s work on pension reform and resources for those wishing to pursue pension reform in their states, counties, and cities. Feel free to contact the Reason Pension Reform Help Desk by e-mail at pensionhelpdesk@reason.org. 

Follow the discussion on pensions and other governmental reforms at Reason Foundation’s website and on Twitter @ReasonPensions. As we continually strive to improve the publication, please feel free to send your questions, comments, and suggestions to zachary.christensen@reason.org.

The post Pension Reform Newsletter: Bill endangers Alaska’s reforms, Louisiana bills would weaken retirement system, and more appeared first on Reason Foundation.

The most notable measures being considered align closely with three national public retirement plan trends dealing with the current rise in the cost of goods, states’ difficulty retaining public workers, and the politicization of public pension fund investments. Here’s the Pension Integrity Project’s overview of these trends and the public retirement-related legislation currently being considered in Louisiana.  

Cost-of-Living Increases

The United States is experiencing the highest rate of inflation in 40 years, making everything more expensive, and several state bills under consideration in Baton Rouge grapple with how inflation impacts public pensions and retirees. Without Social Security, many retired from Louisiana’s public workforce have only their fixed public pension benefit through their golden years, leading retirees to be especially vulnerable to inflation. To address this issue, Louisiana public retirees depend on a complicated set of rules tying market returns to their pension systems’ ability to grant a cost-of-living adjustment (COLA). The result over the last decade has been “confusion surrounding when a COLA is likely to be granted as well as how much the ultimate cost to employers will be,” according to state actuaries. 

In an effort to address retirees’ inflation concerns, State Sen. Edward Price, chairman of the Louisiana Senate Retirement Committee, introduced a suite of bills granting retirees of the three largest state-sponsored retirement systems a supplemental retirement benefit. For public employees, House Bill 5 would issue a supplemental benefit in the form of a one-time bonus—commonly referred to as a 13^th check—that does not increase the base pension benefit for retirees in any future year. 

The additional pension check is expected to cost the state approximately $85 million for retirees in the Louisiana State Employees’ Retirement System (LASERS). This cost is expected to be limited to the one-time check being issued and would not carry over to subsequent years. 

The 13^th check concept is not unique to Louisiana. In 2021, Texas lawmakers issued a 13^th check to retired teachers, who hadn’t seen a cost-of-living adjustment for over a decade at the time. The mechanism for adjusting benefits to accommodate inflation built into the Texas system failed to trigger a payment. This was due to decades of inadequate funding into the pension system, stemming from a combination of outdated funding policies and underperforming investments. Texas lawmakers decided to issue a supplemental, one-time benefit payment from the state’s budget surplus to retirees. This differs from Louisiana’s proposal for an additional check, which would be funded with part of LASERS’ investment gains. 

If lawmakers feel a 13^th check is needed, the Texas approach would be better for Louisianans because it ensures the cost associated with this bonus is limited to one-time appropriations. In contrast, the cost of the proposed LASERS 13^th check would extend beyond the initially reported price because the pension system would be paying for the bonus check by reducing its assets that should be generating investment returns over time.

Louisiana’s House Bill 6 and House Bill 7 would permanently increase public pension benefits, with state taxpayers as underwriters. Expected to initially cost the Teachers’ Retirement System of Louisiana (TRSL) $369 million and the Louisiana State Police Retirement System (LSPRS) $9.5 million, both TRSL and LSPRS permanent benefit increases bump retiree benefits indefinitely. This means the accuracy of each plans’ assumptions would dictate the ongoing costs of the benefit increase. If investment returns for either pension plan perform below expectations, the difference would either increase the systems’ unfunded liabilities or employer costs. 

These bills use funds from each systems’ respective experience account to issue the one-time payment. Louisiana’s public pension experience accounts—created in 1992—use returns on pension investments above a set threshold to fund cost-of-living adjustments. The problem with this policy is that actuaries and plan administrators depend on good investment years to make up for any funding ground lost in the years that investments don’t meet expectations. Each plan’s experience account skims and redirects investment returns from each fund to pay for permanent benefit increases and this way of funding cost-of-living adjustments, Louisiana’s legislative auditor warns, empties each pension system’s experience account resulting “in an increase in expected future employer contributions.” 

State Rep. Tony Bacala introduced a cost of living measure relating to the Municipal Police Employees’ Retirement System (MPERS). But instead of issuing an immediate, one-time 13^th check or a permanent benefit increase, the measure would create a deposit account to hold employer contributions in anticipation of issuing a COLA. The measure differs from the LASER 13^th check and other bills that include permanent benefit increases in that the bill funds COLAs by prefunding a separate account through employer contributions rather than excess investment returns. 

Labor Market Challenges

A second major trend impacting the 2022 regular session is the growing challenge of retaining teachers, first responders, and other public workers amid a dramatic post-COVID-19 rise in retirements. Like many of their private sector counterparts, public employers are struggling to recruit and retain effective workforces in the wake of the pandemic’s economic impacts and a highly competitive labor market. Although there is scant evidence to support claims that retirement benefits a playing any factor whatsoever in worker retention decisions, especially for workers early in their professional careers, policymakers often try to influence employee decisions via retirement benefit policy because they may view it as the easiest carrot, in part due to the deferred cost of retirement benefits.

One example of the clearest examples of using retirement benefits as a carrot this session is State Sen. Jay Morris’ idea to give members of the TRSL Optional Retirement Plan (ORP), who previously made an irrevocable election to join the ORP, the right to revoke that irrevocable election and become participants in the TRSL defined benefit plan. Although ORP members would be responsible for the initial cost of TRSL credits, state actuaries warn that “comparatively generous assumptions” will undercalculate the final cost of each transfer.  

Claims that the bill is cost neutral with respect to changes in TRSL’s unfunded accrued liability were also debunked by state actuaries. In the actual note, actuaries said the passage of Senate Bill 10 “results in an ORP member being able to purchase guaranteed benefits (e.g. a retirement annuity, disability, and death benefits, all guaranteed by TRSL and backed by the State of Louisiana) at a price that is significantly less than the cost of similar benefits on the open market.” 

Similar bills have popped up around the country using similar arguments. For example, the Alaska State House recently passed a measure allowing  transferees to move from their defined contribution plan to a defined benefit plan. The unknown cost and minimal actuarial scrutiny given to the Alaska measure, including the lack of long-term forecasting and stress testing, mirrors the level of review given to SB 10 to date. If market outcomes diverge from TRSL assumptions, the funds transferred will end up being inadequate to provide the promised pension benefits and responsibility for the shortfall will once again fall to taxpayers.

State Sen. Price and State Rep. Bacala introduced a major overhaul to LASERS addressing the fact that only 2.5% of new hires joining LASERS at age 35 will receive full, unreduced retirement benefits. Over two-thirds of LASERS members will leave public employment with only their contributions refunded, leaving more and more Louisianans without Social Security and very little savings for retirement. The new LASERS-specific plan intends to provide non-career members a better means to build their own retirement nest eggs by offering a traditional predefined retirement benefit combined with contributions toward individual retirement accounts. However, as proposed, the measure offers lower individual retirement account contributions than other similar hybrid systems in favor of higher than standard predefined benefits. For the vast majority of LASERS members, the hybrid approach would be an improvement over the current retirement benefit, but the reform falls short in other critical areas. Unfortunately, the hybrid structure being proposed in this legislation not only lacks the technical reforms needed to address the LASERS benefit gap, but it also leaves the state with as much risk going forward, if not more. 

Beyond those two major issues, State Rep. Bacala also introduced a measure that would allow retired members of the Municipal Police Employees’ Retirement System to essentially come out of retirement and accrue additional pension benefits while they are already collecting pension benefits. State Rep. John Illg introduced a similar measure covering the District Attorneys’ Retirement System (DARS) retirees, while a proposal from State Reps. Larry Frieman and Rick Edmonds want to allow teachers to return to work without a suspension or reduction of their retirement benefits.

On a similar note, a number of legislators are attempting to increase the compensation for retirees returning to public employment. State Rep. Lance Harris wants to repeal a required benefit suspension for retirees who are reemployed in certain positions in MPERS, while State Rep. Troy Romero wants to increase the amount a retired teacher may earn while reemployed without a reduction of retirement benefits. State Rep. Phillip DeVillier wants to take a more direct approach and open the LASERS Hazardous Duty Service Plan to certain employees of the state fire marshal’s office not eligible for benefits. 

Pension Fund Investment Activism 

The third trend in pension legislation identified by the Pension Integrity Project at Reason Foundation in the 2022 regular session deals with activism in public pension fund investing. Nearly every state lawmaker has heard at least one call for their respective state to divest from Russian assets in the past weeks. Both the American Federation of Teachers and the American Federation of State, County and Municipal Employees (AFSCME) are urging their pension trustee members to immediately review public pension systems’ investments with ties to Russia following the country’s invasion of Ukraine. 

Calls for activism through public pension fund investments are not new. Even Louisiana Attorney General Jeff Landry recently sent a letter to Louisiana State Treasurer John Schroder asking him to follow the lead of West Virginia State Treasurer Riley Moore, who announced his state would no longer invest with BlackRock, Inc., which has been under fire from Republicans since its CEO talked of “decarbonizing the global economy”

“Divesting from entire sectors – or simply passing carbon-intensive assets from public markets to private markets – will not get the world to net zero. And BlackRock does not pursue divestment from oil and gas companies as a policy. We do have some clients who choose to divest their assets while other clients reject that approach. Foresighted companies across a wide range of carbon-intensive sectors are transforming their businesses, and their actions are a critical part of decarbonization. We believe the companies leading the transition present a vital investment opportunity for our clients and driving capital towards these phoenixes will be essential to achieving a net-zero world.” Blackrock CEO Larry Fink wrote:

“Based on nothing more than a political calculation, many of these calls for divestment run afoul of fiduciary obligations and veer from the primary purpose of public pension systems. These divestment calls would leverage retirement benefits to achieve political goals. As honorable as it is to want assurances that public dollars are not being used to support authoritarian regimes, the complicated global investment strategies propping up these public pension systems make achieving those goals through legislation detrimental to the financial health of these important systems.”

Other Retirement Bills Worth Mentioning

Outside of the national public pension trends that have already made their way to the Louisiana legislature, a few other of the state’s standalone measures related to pensions are worth exploring briefly. 

State Reps. Richard Nelson and Phillip Tarver both offered constitutional amendments requiring a minimum of 50% of all nonrecurring state revenues to be applied to the debt being serviced by Louisiana’s public pension systems. The process by which the infusion is deposited and the impact those transfers would have on the state’s financial health is unclear, but any supplemental appropriation to underfunded pension systems protects retiree benefits and saves taxpayers from costly interest payments on unfunded liabilities. 

Louisiana State House Appropriations Committee Chairman Jerome Zeringue also introduced a supplemental funding measure that would appropriate more than $69 million in additional state general funds from nonrecurring revenue. 

Although previous experience would dictate that many of these measures now under consideration by lawmakers in Baton Rouge are not likely to make it through this session, each touches the financial security of thousands of Louisianians—public workers in the retirement systems and the taxpayers funding them. Like almost everything being considered this session, these bills come with costs and trade-offs that put millions of taxpayer dollars on the line.

The post Louisiana legislature considers several bills that would change public pensions and impact taxpayers appeared first on Reason Foundation.

Thank you for the opportunity to share our project’s perspective on Senate Bill 10 (SB10) and the proposal for allowing Optional Retirement Plan (ORP) participants to transfer their accrued liabilities to the Teachers’ Retirement System of Louisiana (TRSL).

My name is Steven Gassenberger, and I serve as a policy analyst for the Pension Integrity Project at Reason Foundation. Our team conducts quantitative public pension research and offers pro-bono technical assistance to officials and stakeholders aiming to improve pension resiliency and advance retirement security for public servants in a financially responsible way. 

Allowing ORP participants in higher education to revoke an irrevocable election they made upon entering the system, and transfer retirement liabilities to TRSL, contradicts the principles of sound pension funding and is likely to add to the system’s $9.3 billion in debt. 

The Legislative Auditor’s actuarial note makes clear SB10 is “likely not cost-neutral because the actuarial cost for the purchase is based on TRSL’s ‘comparatively generous assumptions’ and the “lack of individual underwriting that an insurance company would undertake.” 

The reason the proposed transfer of ORP funds creates a real risk of near-term TRSL unfunded liability increases lies in the system’s 7.25% assumed rate of investment return. Considering most state pension plans across the country are lowering their growth rate expectations down to, or below, 7%, any future investment underperformance—which capital market forecasts suggest is likely in the decade ahead—and/or adjustments to TRSL’s investment return assumptions will automatically create additional unfunded liabilities. 

Although the state auditor points out that this proposed change will cost more for state taxpayers, there is still no formal actuarial analysis, stress testing, or concrete reporting on exactly how much this added cost will be. Without a detailed analysis of the costs and financial risks that the state could incur under various investment outcomes, it is impossible to properly evaluate the merits of this proposed policy. 

Transferring ORP assets may not be a good deal for employees either. From the transferee’s perspective, ORP vendors may have investments with liquidity restrictions limiting the ability to comply with the 100% transfer requirement within the transfer window period. Other investments may also have early withdrawal reductions that affect the amount eligible for transfer. Even the timing of market conditions could lead to employees withdrawing their ORP at a low value.

SB10 is likely to shortchange members, increase the state’s pension debt, and weaken a TRSL system already burdened with $9.3 billion in unfunded but constitutionally protected retirement benefits.

We commend legislators, members, and stakeholders willing to examine these important issues and thank you again for the opportunity to share our perspective.

The post Testimony: Louisiana Senate Bill 10 is likely to increase pension debt and weaken retirement system appeared first on Reason Foundation.

Download Backgrounder: Senate Bill 10 Undermines TRSL Pension System

The post Senate Bill 10 undermines the Teacher Retirement System of Louisiana appeared first on Reason Foundation.

Thank you for the opportunity to share our project’s perspective on Senate Bill 7 (SB7) and issuing a permanent benefit increase to retirees and beneficiaries of the Louisiana State Police Retirement System (LSPRS).

My name is Steven Gassenberger, and I serve as a policy analyst for the Pension Integrity Project at Reason Foundation. Our team conducts quantitative public pension research and offers pro-bono technical assistance to officials and stakeholders aiming to improve pension resiliency and advance retirement security for public servants in a financially responsible way. 

While offering retirees some sort of inflation protection is commendable, especially when such a large part of the community relies solely on their fixed retirement income, the funding mechanism that SB7 would rely on is structurally flawed, financially questionable, and a national outlier in terms of providing inflation protection in a pension system.

The state currently relies on an experience account funding mechanism that skims what are deemed “excess” returns from the core pension fund. Those funds are then deposited into the system’s experience account to pay for permanent increases to members’ benefit or potentially one-time, so-called “13th check” bonuses. This is nothing like the typical inflation-based cost-of-living adjustments (COLAs) commonly used by U.S. public pension systems. The current process is also similar to a mechanism abandoned in recent years by the retirement systems for Arizona’s public safety employees, judges, and elected officials that was replaced with a simple, prefunded compounding COLA tied to real inflation trends.  This change was due to the resulting debt owed by taxpayers and ongoing financial risks posed by the skimming of investment returns. 

Skimming excess returns drastically alters the way a plan funds its benefits. Returns above the plans’ assumed rate of return are needed to offset years in which returns come in below what was assumed. The state structurally redirecting much-needed investment gains away from its underfunded pension systems—only to fund permanent benefit increases that increase liabilities—prevents plans from enjoying the full benefit of investment gains and weakens fund performance.

According to the state legislative auditor, this method of funding long-term pension obligations also “accelerates the patterns of future transfers expected to go into and out of the Experience Account, which results in an increase in expected future contributions to the plan.” 

Using experience account funds at this time triggers statutory rules that will lead to future transfers from the core pension fund into the experience account, and the timing could not be worse. Even after a historic bull market and 2021 returns, TRSL remains only 71% funded with $9.3 billion in debt. Given the expected market volatility ahead, reactivating experience account transfers out of the core pension would be counterproductive to furthering the system’s financial progress. The rules used to trigger the release of permanent benefit increases do not correspond at all to actual inflation in the economy, so the nature of the benefit itself is not particularly predictable or reliable for the recipients. 

As you consider this legislation, we believe it is important to keep in mind that the reason you are having this conversation at all is because the state’s current method of granting benefit increases does not work well for the state, public employees, or taxpayers.

We commend legislators, members, and stakeholders willing to examine these important issues and thank you again for the opportunity to share our perspective.

The post Testimony: Senate Bill 7 could weaken Louisiana State Police Retirement System appeared first on Reason Foundation.

Thank you for the opportunity to share our project’s perspective on Senate Bill 6 (SB6) and issuing a permanent benefit increase to retirees and beneficiaries of the Teachers’ Retirement System of Louisiana (TRSL).

My name is Steven Gassenberger, and I serve as a policy analyst for the Pension Integrity Project at Reason Foundation. Our team conducts quantitative public pension research and offers pro-bono technical assistance to officials and stakeholders aiming to improve pension resiliency and advance retirement security for public servants in a financially responsible way. 

While offering retirees some sort of inflation protection is commendable, especially when such a large part of the community relies solely on their fixed retirement income, the funding mechanism that SB6 would rely on is structurally flawed, financially questionable, and a national outlier in terms of providing inflation protection in a pension system. 

The state currently relies on an experience account funding mechanism that skims what are deemed “excess” returns from the core pension fund. Those funds are then deposited into the system’s experience account to pay for permanent increases to members’ benefit or a potentially one-time, so-called “13th check” bonuses. This is nothing like the typical inflation-based cost-of-living adjustments (COLAs) commonly used by U.S. public pension systems. The current process is also similar to a mechanism abandoned in recent years by the retirement systems used by Arizona’s public safety employees, judges, and elected officials that was replaced with a simple, prefunded compounding COLA tied to real inflation trends. This change was due to the resulting unfunded liabilities and ongoing financial risks posed by the skimming of investment returns. 

Skimming excess returns drastically alters the way a plan funds its benefits. Returns above the plans’ assumed rate of return are needed to offset years in which returns come in below what was assumed. The state structurally redirecting much-needed investment gains away from its underfunded pension systems—only to fund permanent benefit increases that increase liabilities—prevents plans from enjoying the full benefit of investment gains and weakens fund performance.

According to the state legislative auditor, this method of funding long-term pension obligations also “accelerates the patterns of future transfers expected to go into and out of the Experience Account, which results in an increase in expected future contributions to the plan.” 

Using experience account funds at this time triggers statutory rules that will lead to future transfers from the core pension fund into the experience account, and the timing could not be worse. Even after a historic bull market and 2021 returns, TRSL remains only 71% funded with $9.3 billion in debt. Given the expected market volatility ahead, reactivating experience account transfers out of the core pension would be counterproductive to furthering the system’s financial progress. The rules used to trigger the release of permanent benefit increases do not correspond to actual inflation in the economy, so the nature of the benefit itself is not particularly predictable or reliable for the recipients. 

As you consider this legislation, we believe it is important to keep in mind that the reason you are having this conversation at all is because the state’s current method of granting benefit increases does not work well for the state, public employees, or taxpayers.

We commend legislators, members, and stakeholders willing to examine these important issues and thank you again for the opportunity to share our perspective.

The post Testimony: Louisiana Senate Bill 6 relies on a structurally flawed funding mechanism appeared first on Reason Foundation.

Thank you for the opportunity to share our project’s perspective on Senate Bill 5 (SB5) and the potential one-time, lump-sum payment to retirees and beneficiaries of the Louisiana State Employees’ Retirement System (LASERS).

My name is Steven Gassenberger, and I serve as a policy analyst for the Pension Integrity Project at Reason Foundation. Our team conducts quantitative public pension research and offers pro-bono technical assistance to officials and stakeholders aiming to improve pension resiliency and advance retirement security for public servants in a financially responsible way. 

Unlike some of the other bills under consideration, SB5 providing a one-time bonus to beneficiaries is not expected to permanently increase future benefit payments. Offering retirees a bonus to protect the value of their earned benefit in a way that also protects the financial health of the LASERS system is a win-win for all stakeholders. However, the funding mechanism used to pay for the bonus leverages the entire balance of the system’s experience account, which is likely to undermine the claim that SB5 is a one-time cost.

The state currently relies on an experience account funding mechanism that skims what are deemed “excess” returns from the core pension fund. Those funds are then deposited into the system’s experience account to pay for permanent increases to the base benefit or potentially one-time, so-called “13th check” bonuses. This is nothing like the typical inflation-based cost-of-living adjustments (COLAs) commonly used by U.S. public pension systems. The current process is also similar to a mechanism abandoned in recent years by the retirement systems for Arizona’s public safety employees, judges, and elected officials retirement systems that was replaced with a simple, prefunded compounding COLA tied to real inflation trends. This change was due to the resulting unfunded liabilities and ongoing financial risks posed by the skimming of investment returns. 

Skimming excess returns drastically alters the way a plan funds its benefits. Returns above the plans assumed rate of return are needed to offset years in which returns come in below what was assumed. The state structurally redirecting much-needed investment gains away from its underfunded pension systems—only to fund permanent benefit increases that increase liabilities—prevents plans from enjoying the full benefit of investment gains and weakens fund performance.

According to the state legislative auditor, this method of funding long-term pension obligations  “accelerates the patterns of future transfers expected to go into and out of the Experience Account, which results in an increase in expected future contributions to the plan.”

Using experience account funds at this time triggers statutory rules that will lead to future transfers from the core pension fund into the experience account, and the timing could not be worse. Even after a historic bull market and 2021 returns, TRSL remains only 71% funded with $9.3 billion in debt. Given the expected market volatility ahead, reactivating experience account transfers out of the core pension would be counterproductive to furthering the system’s financial progress. The rules used to trigger the release of permanent benefit increases do not correspond to actual inflation in the economy, so the nature of the benefit itself is not particularly predictable or reliable for the recipients. 

As you consider this legislation, we believe it is also important to keep in mind that the reason you are having this conversation at all is because the state’s current method of granting benefit increases does not work well for the state or for taxpayers.

We commend legislators, members, and stakeholders willing to examine these important issues and thank you again for the opportunity to share our perspective.

The post Testimony: Louisiana Senate Bill 5’s bonus payment unlikely to be a one-time cost appeared first on Reason Foundation.

The post Keeping politics out of public pension investing appeared first on Reason Foundation.

Last year, 2021, was one such year. Last fiscal year, most public pension plans saw record-breaking investment returns. In 2022, these pension plans have the opportunity to update their investment return rate assumptions.

Discount rates are used to calculate pension costs, and the assumed rate of returns is used to project asset growth. It is often difficult and costly for pension plans to lower their discount rates and assumed rates of return because doing so causes the plan to recognize that investment returns will be lower in the future. Those lower market return projections mean the cost of funding pension benefits will increase elsewhere. Thus, lowering discount rates and assumed rates of return requires state and local governments to make up the difference between the rate they previously assumed investments would return and the new lower rate of returns. That difference means increased contributions from state and local budgets or higher contributions deducted from plan members’ salaries. 

The Pension Integrity Project’s analysis of the Louisiana State Employees Retirement System’s (LASERS) pension debt growth shows that changes to actuarial assumptions have increased how much the state must contribute to the plan to fund retiree benefits. Around $2.4 billion in previously unrecognized debt was revealed between 2000 and 2021 because of changes to investment return assumptions. While not all of this shortfall needs to be paid immediately, this has contributed to the plan’s growing annual costs.

Adjusting actuarial returns sooner rather than later can reduce long-term costs. For example, LASERS averaged a 7.1% compound investment return rate between 2000 and 2021. If the plan had reduced its return assumption closer to 7% immediately after the 2008 financial crisis, it would have increased state contributions to the fund each year, potentially avoiding the debt accrued between 2008 and 2021 when actual returns were falling below the plan’s assumed rate of return. Lowering investment return assumptions would have taken a larger portion of the state budget each year, but pre-funding public pension benefits in this way would have been less expensive than having to pay interest on the $2.4 billion that has been added to the fund’s total debt load as a result of overly optimistic investment return expectations. 

Last year, the LASERS Board slightly reduced the pension plan’s discount rate and return assumption from 7.55% to 7.4%. Incidentally, last year’s investment return of 31.48% translated into $273 million in asset growth. This figure almost exactly matches the $270 million it cost the plan to make the discount rate adjustment, providing a good example of how extra investment gains can help plans fund costly assumption changes and reduce the chance of adding more debt in the future.

Another great use of one year of outstanding investment revenue is paying down existing debt. Per Act 399 of 2014, LASERS appropriates the first $100 million (indexed annually by growth in actuarial assets) of excess returns toward paying down legacy debt). In 2021, LASERS allocated $117.4 million of the excess investment revenue (the actuarial asset return above the assumed rate) toward paying down its legacy debt. 

Per the same policy, however, 50% of the remaining excess revenue went to fund permanent benefit increases, which is an increase in benefits that is not properly pre-funded and arguably one of the worst parts of the plan’s pension funding policy.

Louisiana is not alone in taking action to reduce actuarial assumptions after a year of excellent investment performance. The California Public Employees’ Retirement System—the world’s largest public pension plan—is implementing a plan to lower its assumed return and discount rate from 7.0% to 6.8%, and many other state-managed plans are going below the 7.0% target and bumping up the inflow of annual contributions to brace for the expectation of lower long-term returns. The New York State Common Retirement Fund, the third-largest public pension plan in the U.S., has lowered its return rate target from 6.8% to 5.9% following a staggering 33.5% return in 2021. 

“We have a unique opportunity to better position the funds for the long term because of the outsized returns that we’ve had in the past year [2021],” New York State Comptroller Thomas DiNapoli told Bloomberg.

Lowering investment return assumptions and discount rates are also supported by recent market forecasts which show public pension plans are likely to achieve closer to 6.0% investment returns over the next 20 years.

It is wise for public pension systems to use a single year of impressive investment gains to better prepare their fund for the future. Lowering investment return rate assumptions can help reduce the risks of future shortfalls and ensure proper funding of retirement benefits for teachers and other public workers.

The post How public pension plans can use last year’s investment returns to reduce debt and future risk appeared first on Reason Foundation.