As it stands, California’s state and local governments have the most public pension debt in the country, with total unfunded pension liabilities of more than $265 billion, according to a new report from the Reason Foundation. That’s over $6,000 in pension debt for every state resident. CalPERS has $166 billion in debt, and CalSTRS has $39 billion in unfunded liabilities.

Since pension benefits promised to government workers are constitutionally protected, taxpayers are on the hook for that debt. In the years ahead, paying this pension debt will consume an ever-larger portion of state and local budgets.

So, to pay for retirement promises already made to government workers while also hoping to keep costs down, public pension systems are chasing new investment return strategies and targets. Worryingly, California’s over-reliance on high-risk, high-return strategies could result in overwhelming losses, a burden that taxpayers would ultimately bear.

Historically, pension plans have relied on investments like stocks and bonds, but many plans are moving away from this strategy and dedicating more assets to higher-risk investment strategies, such as real estate, hedge funds, private equity, and commodities, for which it can be challenging to obtain accurate market value information, and reporting periods lag behind those of traditional investments.

The Reason Foundation finds that in 2001, only 11% of California’s pension assets were allocated to alternative investments. However, by 2024, this share had increased to 37%, which is the 18th-highest in the nation.

CalPERS has more than doubled its shares in private equity over the last four years (from 6.3% of its total assets in 2020 to 17% in 2024), and it plans to expand further, so that private assets (private equity and private debt) make up 40% of its portfolio.

As it attempts to make up for the failure to set aside enough money to pay for promised retirement benefits, CalPERS is moving away from safer, predictable investment options in the hopes of better returns from riskier options that charge high fees, come with less transparency, and more risk and volatility that could leave taxpayers holding the bag.

With debt and costs rising, the pressure to take public pensions in this direction is strong because investment outcomes greatly impact overall funding progress and contribution requirements. The pressure is also increasing because California’s pensions have generated investment returns that fall below those of other pension systems nationwide.

Over the past 20 years, CalPERS achieved an average return of 6.8%, and CalSTRS achieved 7.6%, both of which are far below the S&P 500 average of 10.4% for the period.

Even over the last five years, during which CalPERS and CalSTRS have adopted higher-risk strategies in the hope of achieving better investment returns, California still ranked 36th out of 50 states in average investment returns for all public pension plans. California’s average investment return over the past five years was 7.51%, while Nevada ranked first with 9.67% average returns, and Washington state was second with 9.66% average returns for its pension systems during that time.

It is in taxpayers’ best interests for CalPERS, CalSTRS, and other public pension plans to achieve high investment returns, but investment strategies should include a thorough evaluation of the downside risks. Private equity charges high fees that primarily benefit fund managers, not retirees or taxpayers. They have opaque accounting practices and market valuations. They offer the potential for high investment returns, but that comes with high risk that they could fail to deliver.

Underestimating the risks associated with alternative investments could lead to even more costs. Taxpayers at the state and local level would see more money siphoned away from infrastructure, education, and public safety to make up for investment losses and to pay public pension debt. California’s pension systems should be more cautious about taking risks with taxpayers’ money and workers’ retirement benefits.

A version of this column first appeared at The Orange County Register.

The post California’s state and local pension plans have over $265 billion in debt appeared first on Reason Foundation.

San Diego’s $2.5 billion unfunded pension liability accounts for about 40% of the city’s total $6.8 billion debt. In the 2024 fiscal year, the city paid about $500 million in pension contributions, nearly 60% of which goes toward paying down pension debt. With unfunded pension liabilities and the city facing $540 million in forecasted budget deficits in the coming years, it has imposed a wave of unpopular taxes and fees on solid waste, parking, hotel stays, and more. Today, it is more than justifiable for taxpayers to question whether local leaders have given sufficient consideration to spending reductions and service streamlining relative to raising taxes and fees.

San Diegans felt similarly in 2006 when they passed Proposition C, authorizing “managed competitions” in which private companies would compete against city workers to reduce costs and increase innovation in delivering city services.

Managed competition can be transformational, generating cost savings of 5% to 20%. This technique has been successfully implemented in numerous states and cities, including Phoenix, Charlotte, and Indianapolis.

Former Indianapolis Mayor Stephen Goldsmith told Governing that the robust managed competition program implemented during his terms in the 1990s created over $400 million of value for city taxpayers. In Florida, former Gov. Jeb Bush’s administration conducted more than 100 managed competition initiatives that saved taxpayers more than $550 million.

But managed competition requires leadership committed to driving ongoing improvements, results and value. Politics and special interests can make managed competition challenging to sustain over time, as happened in San Diego.

City leaders didn’t fully embrace the managed competition effort, dragging out its implementation for years. Then they tended to give public employees special treatment relative to private firms regarding their cost estimates to deliver services, projections of future service demand, and the ability to penalize underperformance. It wasn’t a level playing field for private firms, and the city wasn’t pushing for efficiencies from government agencies. Rather than build the capabilities to improve these things, San Diego stopped trying.

From a taxpayer perspective, it is time to give competition another chance.

The rising costs of residential solid waste are a prime example. The private sector already picks up 70% of San Diego’s solid waste from businesses and apartments, with the city’s solid waste operation collecting the remaining 30% from single-family neighborhoods and multiplexes. The city’s costs have gotten so high that it is imposing a new solid waste tax on homeowners. San Diego did not see fit to test the market with the private firms that perform the same job in surrounding cities at significantly lower costs.

Phoenix has been applying managed competition in residential solid waste collection since 1979, dividing the city into zones and competing trash service in each zone every six years. In 2011, Phoenix’s Public Works Department told Government Technology that competition had generated $38 million in cumulative savings to that point.

San Diego’s leaders owe it to taxpayers to test the market and ensure that city workers are performing their jobs at maximum efficiency and at the lowest possible cost. Frustrated San Diegans rightfully wonder why the city didn’t implement this approach instead of raising taxpayers’ costs with the trash fee while continuing to do business with the same city employees. Worse, city officials are executing this implicit city job protection program at a time when every worker hired is adding significant costs and financial risks to San Diego’s already underfunded pension system.

Two decades ago, San Diego’s financial mismanagement earned it the moniker “Enron-by-the-Sea” and prompted taxpayers to demand procurement and pension reforms to save money. But as things improved over time, the city abandoned competition. And after state courts blocked a pension overhaul approved in a landslide in 2012, elected leaders ignored residents’ wishes and made no effort to craft a similar reform.

Instead of asking taxpayers to pay more taxes and fees to cover the city’s spending and debt, San Diego should give managed competition a fair chance to see if government agencies can improve efficiency or if the private sector can deliver better services at lower costs.

A version of this column first appeared at The San Diego Union-Tribune.

The post San Diego’s government needs more competition, not more taxes appeared first on Reason Foundation.

States owe $2.7 trillion in debt, cities hold $1.4 trillion, school districts have $1.3 trillion, and counties owe $760 billion, according to a review by Reason Foundation of more than 20,000 financial statements filed by government entities for their 2023 fiscal years, the most recent period with complete data available.

In total, California’s state and local governments hold $1 trillion in debt, the highest in the nation. New York’s state and local debt is the second-most, at $800 billion, followed by Texas at $550 billion, Illinois at $410 billion, New Jersey at $310 billion, and Florida at $240 billion.

Additionally, Massachusetts, Pennsylvania, Ohio, Washington, Michigan, Georgia, Maryland, Connecticut, North Carolina, and Colorado each have more than $100 billion in state and local government debt.

On a per-capita basis, the state and local debt numbers are even more eye-opening, with states like Hawaii, Delaware, and Wyoming having surprisingly large debt loads per resident.

Nationally, state and local government debt amounts to about $18,400 per person. In New York, Connecticut, New Jersey, Illinois, and Hawaii, state and local debt exceeds $30,000 a person.

Following them are Massachusetts, California, Alaska, North Dakota, Delaware, Wyoming, and Maryland, all of which have state and local liabilities in excess of $20,000 per resident.

Over 40 percent of state and local government debt consists of unfunded pension and healthcare benefits promised to public workers. State and local pension debt amounts to $1.5 trillion, with an additional $1 trillion in healthcare benefits promised to retirees.

The bonds that governments issue to fund infrastructure projects, such as roads and bridges, to build and upgrade schools, and to pay for other programs, represent an additional 33 percent of all state and local debt.

These debts have three negative consequences for taxpayers. First, the annual interest costs and debt payments are starting to crowd out essential services. Many local governments are already being forced to divert funds from taxpayers’ priorities, such as education, policing, and transportation, to pay for promised public pension benefits that they haven’t set aside the necessary money for.

Second, as governments struggle to cover rising interest and pension payments, some politicians will seek to raise taxes and fees, placing a growing burden on taxpayers. The scale of tax increases needed to pay for these public pension debts could also hinder economic activity within communities, reducing revenues and further increasing debt woes.

Third, current levels of debt weaken long-term balance sheets, harming the future. Some cities and states haven’t borrowed or spent wisely, so they’ll be looking to borrow more money to modernize their infrastructure, schools, and technology in the years ahead. However, today’s debt burden will make borrowing more expensive and potentially raise the interest rates on new bond issuances, costing taxpayers even more.

To address this mountain of debt and restore fiscal stability, state and local governments must sustainably align spending with revenues. In years with a robust economy, governments should use budget surpluses to pay down debt rather than funding new or existing programs.

For mega-infrastructure projects, such as major highway and bridge repair, replacement, and expansion, public-private partnerships can be used, allowing the private sector to bear the initial construction costs and any overruns, rather than taxpayers.

Ultimately, the most significant drivers of state and local debt are pensions and retiree healthcare benefits, which must be reformed to ensure they are fully funded and prevent the accrual of debt.

State and local governments have far less ability to keep piling up debt the way the federal government does. The bill is coming due, and cities and states that pay down debt quickly and right-size government will be best positioned for the future.

A version of this column first appeared at The DC Journal.

The post State and local governments are drowning in debt appeared first on Reason Foundation.

Connecticut’s $60 billion Retirement Plans and Trust Funds exist to fund the retirement benefits promised to public workers, not to serve as a bailout vehicle for a professional sports franchise or to promote Connecticut’s economic development.

Gov. Lamont’s efforts to keep the Connecticut Sun in the state come as a Boston-based private equity group led by Celtics minority owner Steve Pagliuca reached a $325 million deal to buy the team and relocate it to Boston in 2027, pending league approval.

Connecticut’s state and local governments have recently made an impressive fiscal recovery after decades of budget neglect. The adoption of spending guardrails and mechanisms that enabled surplus pension contributions has stabilized finances, reduced bonded debt, improved pension funding, and led to credit rating upgrades. But recent fiscal improvements are no excuse for pursuing pension investments for political symbolism rather than financial merit.

The state’s fiscal job is unfinished: Connecticut still ranks second in the nation in terms of per-capita public employee debt (which includes unfunded pension and retiree healthcare liabilities). Furthermore, the state’s pension trust—which calculates contributions presuming a 7% annual return—has earned an average return of just 5.7% over the past 24 years (2001-2024), while the S&P 500 returned 10.6% over the same period, according to the Reason Foundation’s 2025 Annual Pension Solvency and Performance Report.

If the goal of this proposed investment in the Connecticut Sun were to maximize investment returns, it wouldn’t have been paraded in such a manner. A financially motivated investment is one where Connecticut’s pension funds would be comfortable selling at any time deemed advantageous; it is one where the state feels comfortable advocating for management decisions that benefit the team the most, which could very well mean moving out of Connecticut.

In fact, politically motivated investment harms not only the state’s pension plans but also the Connecticut Sun itself. The team would be better off with investors who are genuinely interested in its success, rather than ones whose primary goal is merely to retain the team in a particular geographical location, even if that is not conducive to the team’s ability to compete and win.

Sports teams can be great investments if managed correctly, but the upside comes with a delicate bundle of risks. Professional sports franchises are relatively illiquid, with valuations that fluctuate depending on revenue trends, media rights, and local market conditions. Future exit prospects are also limited, because—unlike an investment in a publicly traded company—only so many people/institutions are willing and able to buy a professional sports team.

If the Connecticut Sun turned out to be a bad investment for the state’s pension plan, public employees in the plan would likely not bear the harm: they are still guaranteed their retirement benefits regardless of investment outcomes or cost increases. The risk instead falls on taxpayers, who must cover any funding gap in the pension fund through higher property, income, and sales taxes.

Connecticut’s pension funds are fiduciary funds established to fund retirement obligations while avoiding unnecessary risk, not a piggy bank for pet political projects. Any sports investments, like all other pension fund investments, must be evaluated on a single criterion: maximizing risk-adjusted returns for beneficiaries and taxpayers.

A version of this column first appeared at The Connecticut Mirror.

The post Connecticut’s pensions shouldn’t make political investment in WNBA team appeared first on Reason Foundation.

Articles, Research & Spotlights 

• Analysis Shows Debt Drives the Rise in Pension Costs
• Ohio Bill Would Advance Shared Pension Responsibility
• California Pensions Rank High on Investment Risk, But Low on Returns
• Florida Still Has Decades to Go Before Fully Funding Pension Benefits

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

Articles, Research & Spotlights

Most Pension Contributions Go Toward Paying Off Debt, Not Funding Benefits

Pension benefits promised to public workers have become increasingly expensive, squeezing state and local budgets nationwide. A new analysis from Mariana Trujillo uses Reason Foundation’s Annual Pension Solvency and Performance Report to dive into the growth of public pension costs over the last decade. Since 2014, annual pension costs have risen by 26% nationwide, with some states, like New Jersey and Alaska, seeing their pension costs rise more rapidly than others. With employee contributions remaining relatively stable, taxpayers have had to bear the bulk of this growing burden. Trujillo’s analysis finds that public pension debt, not new retirement benefits, is the primary driver behind these trends. In fact, more than half of employer pension contributions (55%) are now allocated to address the estimated $1.5 trillion aggregate state and local public pension funding shortfall.

Ohio House Bill 473 Could Balance Public Pension Plan Contributions

New legislation under consideration in Ohio aims to improve transparency and balance the burden of pension costs between employees and employers. House Bill 473 would restrict state and local government employers from paying all or a portion of an employee’s contribution obligation, a practice commonly known as a “pickup.” While governments use pickups to attract quality workers, this practice masks the true cost of a retirement benefit and distorts market signals that are important for informed policymaking. In comments submitted to the Ohio legislature, Reason Foundation’s Zachary Christensen explained the value of collaboration between employees and the taxpayer (represented by lawmakers) in a retirement plan and the importance of transparency in that partnership. 

California’s Pensions Are Relying on Riskier Investment Strategies

Facing more than $265 billion in unfunded pension liabilities and ever-increasing costs on local governments, California’s pension systems are turning toward high-risk investment strategies they hope will offer high rewards. As Reason Foundation’s Zachary Christensen explains in a recent op-ed, every resident in the Golden State is on the hook for about $6,000 in pension debt, so there is real pressure for the state’s pensions to catch up with above-average investment returns. The California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) aim to achieve higher returns by increasing their investments in alternatives, such as private equity and hedge funds. However, this strategy also carries significant downside risk, which will ultimately be borne by increased costs on taxpayers.  

Florida Must Stay the Course to Pay for Promised Pension Benefits

New estimates indicate that the Florida Retirement System (FRS) will need at least 17 more years before reaching full funding, but lawmakers are considering adding to these already underfunded pension benefits with proposals to bring back cost-of-living adjustments (COLA) for retirees. Zachary Christensen and Steve Vu from the Reason Foundation provide analysis applicable to this discussion, finding that even without granting a new COLA, a single year of bad returns (0%) could still undo years of progress in the system’s funding. A major recession could extend the full funding date beyond 30 years and would require significant increases in annual costs on taxpayers. With these remaining risks in mind, lawmakers need to avoid diverting from the state’s current path through more risky promises to public workers.

News in Brief

Market Volatility Poses a Bigger Threat to Pension Stability Than Long-Term Averages Suggest

A new pair of whitepapers from Sage Advisory and First Actuarial Consulting shows that many public pension boards assume the same return every year—typically around 7%—even though markets rarely behave that way. These fixed-return models make plans appear stable and fully funded, but they hide the real risks facing systems that pay out far more in benefits than they take in. When a plan has a large negative cash flow, early market losses matter much more than average returns. In these cases, trustees may be forced to sell assets during downturns, locking in losses and creating a long-term funding problem that the “smoothed” projections never reveal.

The second paper focuses specifically on this timing problem—known as sequence-of-returns risk—and explains why it is a structural issue for mature pension systems. When contributions are too small relative to benefit payments, the plan depends heavily on investment gains to maintain its funded status. But if significant losses occur early, the plan must liquidate assets at low prices to keep paying retirees. This shrinks the asset base, reduces future compounding, and can drive down the funded ratio even if markets recover later. Data from the largest plans illustrate this clearly: systems with the most negative cash flow experienced the most significant funding declines over time. The papers are available here and here.

Quotable Pension Quotes 

“Any time you give a benefit, and you don’t pay for it today, it’s like buying it on a credit card. You’re eventually going to have to pay the bill. And those decisions in the ‘90s have left us a large bill in 2026.”
–Mississippi State Sen. Daniel Sparks (R-District 5), quoted in “Mississippi’s PERS faces $26 billion debt,” WJTV, Nov. 6, 2025.

“In the late ‘90s and early 2000, there were some additional benefits placed into law without additional funding at the time. Also, in the two subsequent decades, we had a declining active to retiree ratio, meaning there were fewer active PERS covered members paying into the system and more retirees coming onto the system and retirees living longer.”
–Ray Higgins, executive director of Mississippi PERS, quoted in “Mississippi’s PERS faces $26 billion debt,” WJTV, Nov. 6, 2025.

“If the state fails Safe Harbor, then we would have to enroll everybody into Social Security. So that would more than double what we’re paying right now, […] Almost half our budget would have to go to pensions and Social Security. … So the cost of doing nothing is extreme.”
–Illinois state Rep. Stephanie Kifowit (D-Oswego), quoted in “Tier 2 pension reform bill moves forward, but Pritzker says there’s ‘a lot more work’ to do,” Capitol News Illinois, Oct. 30, 2025.

Data Highlight

Reason Foundation’s Mariana Trujillo explains why most state and local government pension contributions no longer fund current employee benefits. More than half of every dollar contributed to public pension plans now goes toward amortizing legacy pension debt—driven by decades of underfunding and overly optimistic return assumptions—rather than paying for benefits earned each year. Read the full analysis here.

Reason Foundation in the News

“Most plans are taking a lot more risk in their investment portfolio than they used to, and so there’s a lot more volatility than there ever was in pension plan returns.”
—Reason’s Ryan Frost quoted in “Illinois is tops in unfunded state and local pension liabilities per capita,” The Bond Buyer, Oct. 31, 2025.

“Over 40 percent of state and local government debt consists of unfunded pension and healthcare benefits promised to public workers. State and local pension debt amounts to $1.5 trillion, with an additional $1 trillion in healthcare benefits promised to retirees.”
—Reason’s Mariana Trujillo and Jordan Campbell writing in “State and Local Governments Are Drowning in Debt,” Inside Sources, Nov. 19, 2025.

“Yet few governments have set aside money to pay for their retirees’ future healthcare costs. The Reason Foundation reports that state and local governments faced $958 billion in retiree medical obligations in 2023, about $2,900 per American. The liabilities are largest in blue states like New York ($15,017 per capita), New Jersey ($10,599) and Connecticut ($6,657), which let workers retire early with generous health benefits.”
—Alyssia Finley writing, “The ObamaCare Blue-City Bailout,” in The Wall Street Journal, Nov. 7, 2025.

“The saying in the pension world is that most pension funds have been 20 years away from paying off their unfunded liabilities for the past 20 years.”
—Reason’s Mariana Trujillo quoted in “Unfunded pensions make up a large portion of California’s $1 trillion debt,” State Affairs, Oct. 31, 2025.

The post Pension Reform News: Reason analysis shows debt drives the rise in pension costs appeared first on Reason Foundation.

One way to evaluate the burden of pension contributions is to measure their size in comparison to payroll. Between 2014 and 2024, average pension contributions by state and local governments rose from 23% to 29% of payroll—a 26% increase, Reason Foundation’s Annual Pension Solvency and Performance Report finds.

Differences among states

The median pension contribution rate as a share of payroll in 2014 was 22%; in 2024, it was 26%.

Among states, New Jersey saw the highest increase during these 10 years, 28.5 percentage points, with the aggregate contribution rate going from 13.5% to 42%. Alaska’s 28-point increase, from 41% to 69%, was the second largest, followed by Wisconsin (+25 percentage points), Kentucky (+18), Connecticut (+15), and California (+15).

In eight states, however, thanks to some combination of fiscal discipline, additional pension contributions, strong financial returns, and successful pension reforms, pension contributions as a share of payroll actually decreased between 2014 and 2024, including West Virginia (-7.7 percentage points), New York (-6.4), and Indiana (-3.1).

Some of the observed increases in contribution rates may actually reflect fiscal prudence, not recklessness. States that have made either one-time or ongoing additional contributions to their pensions—such as Connecticut, West Virginia, and Alaska—will have higher contribution rates in the years those additional payments are made. These payments accelerate the amortization schedule and cut decades of interest costs, generating long-term savings. In subsequent years, as their debts are paid off, their required contribution rates should decline.

Amortization rises while normal cost stays stable

One might assume that the long-term nationwide increase in pension contribution rates is a result of public employee pensions becoming more generous. That is not the case. Instead, larger contributions have been needed to compensate for past underfunding—that is, to make up for decades of underestimating the true cost of providing the pensions promised to state and local employees.

There are two components of contribution rates: normal costs and amortization costs.

Normal Cost: The portion of pension contributions used to cover the cost of benefits earned in a given year. This is a forward-looking estimate of the amount that needs to be contributed to pay the benefits accrued by employees during the fiscal year.

Amortization cost: The portion of pension contributions used to pay down unfunded pension liabilities, which arise because normal costs were either underestimated or not fully funded in the past. This is a backward-looking payment, structured over a set period (e.g., 20–30 years), to gradually pay down pension debt.

From 2014 to 2024, normal costs have remained virtually flat, even declining slightly, from 14% to 13%. Meanwhile, amortization costs have increased from 9% to 16%—an 80% increase.

There are two main drivers of the significant increase in amortization costs: first, a widespread, decades-long underestimation of the true cost of the pension benefits promised to public employees; and second, retroactive benefit increases.

The underestimation of costs has been primarily driven by chronic overestimation of investment returns. Since the 2000s, public pensions have assumed that they would earn higher investment returns than they really have. Plans have been increasingly forced to reckon with this reality, and amortization costs have risen to compensate.

Normal costs have been stable. This is due to public pension reforms across the country—such as the creation of new tiers, fine-tuning of cost-of-living adjustments (COLAs), and the introduction of defined contribution plans—which have kept actuarial costs stable.

Some increases in pension benefits, however, do not manifest as increases in normal costs, which only capture actuarial and pre-determined benefits. When benefits enhancements are forward-looking and pre-funded—as they are supposed to be—normal costs increase correspondingly. But in some cases, state legislatures and cities give retroactive pension enhancements—such as increased salary multipliers or COLAs—without pre-funding them. The costs of such retroactive benefit increases show up all at once, as a debt to be amortized, and only to a small degree, as an increase in normal costs. Because amortization costs have been rising while normal costs have remained stable, the composition of pension contributions has shifted. In 2014, 60% of pension contributions were directed to fund the pension benefits that current employees accrued that year. By 2024, only 45% of contributions funded current benefits. More than half of the contributions, 55%, go toward covering previous underfunding.

State and local governments have footed the increase

In almost all defined benefit plans, employee contribution rates are fixed. If the costs of pension benefits unexpectedly increase due to the expansion of COLAs, disappointing investment returns, or readjustments to discount rates, employers—that is, the sponsoring state or local government—must cover this difference on their own.

That explains the following chart, which shows that, from 2014 to 2023, employer contribution rates increased by 31%, while employee contribution rates rose by only 14%.

State and local governments have had to absorb nearly all of the increased pension costs, because, ultimately, it is public employers—and, by extension, taxpayers—who bear full risk for any unexpected costs in funding pension benefits. The result is that a growing share of current taxpayers’ money is being used to pay pension benefits for past employees—that is, to cover the costs of services they themselves did not use. 

The nation’s estimated $1.5 trillion in government pension debt will continue to generate significant strains on budgets and taxpayers. Lawmakers should continue to prioritize strategies that accelerate amortization schedules and ensure annual contributions are sufficient to pay down existing liabilities, not just maintain them.

Looking ahead, states should adopt cost-sharing and alternative retirement plan designs for new hires that align costs and risks more evenly between employers and employees, preventing the accumulation of new unfunded liabilities.

The post Most public pension contributions go toward paying off debt, not funding benefits appeared first on Reason Foundation.

A new analysis by Aon Investments USA Inc. (a market consulting company), commissioned by the Florida State Board of Administrators (SBA), predicts that the Florida Retirement System, FRS, is on track to eliminate all unfunded pension liabilities by 2042. Lawmakers reformed the system in 2011 by introducing a defined contribution (DC) option called the Investment Plan, and subsequently made it the default retirement plan for most new hires in 2018. These reforms have helped FRS make progress in closing what was a nearly $40 billion funding shortfall after the Great Recession.  

The latest reporting from FRS now gives the system an 83.7% funded ratio (up from 70% in 2009), indicating that the state has made progress but still needs to stay the course to return to its pre-recession, full funding status. According to Reason Foudnation’s recently released Annual Pension Solvency and Performance Report, one bad year in the market (0% returns in 2026) would essentially undo that progress, bringing the system’s unfunded liabilities back to an estimated $40 billion overnight. 

Florida has a long way to go before catching up with its public pension promises 

If market outcomes over the next two decades resemble those of the last 20 years, FRS won’t achieve full funding anytime soon. The pension system’s 24-year average return since 2001 is 6.4%, falling short of the plan’s 6.7% assumption. According to Reason Foundation’s actuarial modeling of FRS, this seemingly small 0.3% shortfall would push the date for reaching full funding out by another three years. 

Another major recession would also significantly derail the system. Reason Foundation’s modeling indicates that an investment loss in 2026 similar to that of 2009 (a 20% loss) would result in a funding ratio of 62%, and it would take 15 years just to climb back to today’s funding levels. The full funding date would extend well beyond 2055 in that scenario. 

Lower market returns would also drive up the annual costs of FRS, which taxpayers and lawmakers should be wary of. In 2024, employers contributing to the FRS pension paid an amount equal to around 12.7% of payroll (totaling $5.6 billion statewide annually). If everything goes as planned, with returns matching the system’s assumptions, this cost will remain relatively stable and drop significantly once the system is free from pension debt. Under the scenario of a major recession, annual costs will need to rise to as high as 22.9% of payroll to maintain full pension benefit payments. 

A recession would necessitate much larger government contributions 

When it comes to public pensions, policymakers can hope for the best, but they need to prepare for the worst. At a minimum, they should structure pension systems to withstand the same market pressures and funding challenges that created today’s costly pension debt.

Florida lawmakers should consider these risks as they weigh proposals to expand benefits. During the 2025 legislative session, lawmakers saw (and rejected) a proposal to unroll the state’s crucial 2011 reform by again granting cost-of-living adjustments (COLAs) to all FRS members.

Reason Foundation’s analysis of the proposal warned that even under a best-case scenario, the move would add $36 billion in new costs over the next 30 years. A scenario in which the system sees multiple recessions over the next 30 years would have driven the estimated costs of the proposed COLA to $47 billion.

For a pension fund that is still many years away from having the assets to fulfill existing retirement promises, the last thing it needs is to double down on more costs and liabilities. 

Current proposals to cut taxes in the Sunshine State should also factor into any consideration of granting additional pension benefits to public workers. A new group of bills introduced in the state’s House of Representatives signals that lawmakers intend to offer several property tax-cutting measures to voters on the 2026 ballot. It is safe to say that the idea of increasing pension costs on Florida’s local governments while simultaneously facing the prospect of reduced tax revenue is ill-advised.  

Through prudent reforms, Florida has made some laudable progress in improving the funding of its public pension system. However, the state is still several years away from achieving the end goal of all these efforts, and any level of market turbulence would push the finish line out by decades. Policymakers need to be aware of Florida’s long-term pension funding strategy and avoid any proposals to add to the costs and risks imposed on taxpayers through new pension benefits. 

The post Florida must stay the course to pay for promised pension benefits  appeared first on Reason Foundation.

Articles, Research & Spotlights 

• Reason’s Annual Report Finds $1.5 Trillion in Aggregate Pension Debt 
• Undoing California’s Pension Reforms Could Cost Billions
• What Government Worker Reductions Mean for Pensions

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

Articles, Research & Spotlights

Reason Foundation’s Annual Pension Solvency and Performance Report Finds $1.48 Trillion in Debt

Today, Reason Foundation is publishing our 2025 Pension Solvency and Performance Report. It’s an interactive dashboard that lets users explore an aggregated, plan-level overview of key public pension funding and investment metrics, actuarial assumptions, and other performance indicators for government-run pensions. New to the report are state rankings of funding, contribution adequacy, and investment metrics. The study compiles 23 years of data from 315 state and local public pension systems in the United States, showing that the total public pension debt now stands at $1.48 trillion at the end of 2024, the most recent year with complete data available. Most of the pension debt, $1.29 trillion, is owed by state governments. Overall, state and local governments have only 79% of the funds needed to fulfill pension promises made to public workers. With $15,804 in pension debt per person, Illinois has the highest unfunded pension liabilities per capita, the study finds. Connecticut has the second-most public pension debt per capita at $10,151, and six other states have public pension debt exceeding $8,000 per person: Alaska, Hawaii, New Jersey, Mississippi, New Mexico, and Kentucky.

In addition to debt and funded ratio information, the report also incorporates the latest market outcomes to estimate 2025 funding measurements. It finds that these metrics are expected to improve over the next year, but a major recession could add more than $1.2 trillion in unfunded liabilities nationwide and undo the funding progress most pension systems have made over the last 15 years. The study also presents other useful measurements on annual costs and investment performance to help understand the challenges facing public pension systems today. The interactive tool is available here. An overview of the findings, snapshots of state debt and funded ratios, and plan-level debt and return rate information are here: 

Report and Webinar: State and local pension plans have $1.48 trillion in debt 
Study: Illinois, Connecticut, Alaska, Hawaii, New Jersey and Mississippi have the most per capita pension debt
Study: The public pension plans with the most debt, best and worst investment return rates

California Faces a Pension Bill that Would Expose Taxpayers to More than $9 Billion in Additional Costs

In 2012, then-California Gov. Jerry Brown signed the Public Employees’ Pension Reform Act (PEPRA), which established much-needed limits on what California’s local governments could promise in pension benefits to public workers. Those public pension reforms are estimated to have already saved the state more than $5 billion and would likely save at least $25 billion over the next decade, but only if lawmakers stay the course and reject recent efforts to undo PEPRA. A new Reason Foundation explainer details how a proposed piece of legislation (Assembly Bill 1383) would undermine the landmark pension reform and could generate more than $9 billion in additional costs for the state’s already underfunded pension system, adding a significant burden to California’s already stretched taxpayers.

How Government Workforce Reductions Can Impact Public Pension Debt

Government shutdowns, hiring freezes, and a growing focus on reducing the size of government are slowing the growth of the public employee workforce in many states. Lawmakers and government administrators should be aware that this could have a negative impact on public pensions if assumptions are not adjusted, warn Reason Foundation’s Steve Vu and Zachary Christensen. Considering the shifting climate in government employment, it is an appropriate time to reevaluate the assumptions used to project the growth of these workforces to avoid surprise costs for taxpayers decades down the road.

News in Brief

AI Familiarity Linked to Higher Retirement Planning Confidence Among Public Employees

A new study from MissionSquare Research Institute explores how the adoption of artificial intelligence (AI) in state and local government workplaces influences employee engagement with retirement planning. Based on a Jan. 2025 survey of 2,000 public employees, the report finds that those who use AI at work are more than twice as likely to use it for retirement planning (57% vs. 26%). Comfort with AI is a strong predictor of interest in employer-provided AI retirement tools: 82% of employees already comfortable with AI express interest, compared with just 15% of those not at all comfortable. Income also matters—employees earning over $100,000 show 116% higher odds of interest than lower-income peers. The employees most engaged with AI are also most likely to work with financial professionals (72% vs. 15%). Read the full study here.

Quotable Pension Quotes 

“The market is running really hot right now. … It’s been good for us, but it won’t always be this good.”
—North Carolina State Treasurer Brad Briner quoted in “Could NC pension fund management changes mean COLAs for retirees?,” News From The States, Oct. 7, 2025.

“If you go back to what happened in 2024, 2023, the cities and counties said, we can’t pay more. These same cities and counties, when you talk about first responders, the majority of them are county and city employees. So, this cost is going to fall back on the cities and counties.”
— Mississippi State Sen. Daniel Sparks quoted in “First responders ask lawmakers to create separate retirement plan,” WLOX, Oct. 2, 2025.

Data Highlight

Reason Foundation’s Annual Pension Solvency and Performance Report provides an interactive funding history of the nation’s public retirement plans. The data dashboard shows if your state is on track to fulfill pension promises made to public workers and previews where these funding measurements would move under various levels of market stress. See the full interactive report here.

Reason Foundation in the News

“We should just be honest about why they raised it to 7.25% […] They did it because they have no money and they didn’t want to make the payments to the pension system. I’m sure the actuaries have justification for raising the assumed rate of return, but let’s be honest.”-Reason’s Ryan Frost, quoted in “Fiscal Fallout: Washington’s pension system gamble,” The Center Square, Sept. 17, 2025.

The post Pension Reform News: Reason’s annual report finds $1.5 trillion in aggregate 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.

House Bill 473 (HB 473) addresses a common issue found in public employee retirement plans. Pension plans depend on regular contributions to fund the benefits that will become available to workers upon retirement. Typically, these contributions are split between the employee and employer according to rates established beforehand or when a public worker is hired. Employees in the Ohio Public Employees Retirement System (OPERS), for example, contribute 10% of their paycheck, while their employer contributes an amount equal to 14% of that member’s pay. These rates are a key part of the decision-making and bargaining that takes place between the employer (in this case, local governments) and a potential hire. 

In an effort to compete for high-value workers, some local employers offer to cover all or part of an employee’s retirement contributions, a practice commonly known as a “pickup.” While the intent of this strategy is honorable—it is in the public’s interest to have experienced and capable government employees—the practice distorts the cost and the purpose of a collaborative retirement plan. 

The reasoning behind a retirement plan in which both employees and employers share the contribution load (by far the most common approach among government pensions) is that it signals to both parties that they are contributing to the same shared goal of a secure retirement. While pickups have no impact on the total amount going toward contributions, they create unnecessary complications with government transparency and cost. Policymakers, administrators, and the public usually evaluate the compensation of public workers based on the hourly wage or salary offered, with pension costs listed and evaluated separately. A pickup arrangement is certainly part of an employee’s total compensation, but it is commonly overlooked since it is part of the larger retirement package offered to all public workers. Analysis comparing compensation between different local government employers usually isn’t sophisticated enough to include the variety of pickup arrangements between each employer and employee. It would better serve the public to make the costs of public service as straightforward as possible without creative compensation strategies. 

As local governments compete for the best public employees, they should do so using clear, transparent, and undistorted compensation. By banning the practice of pickups for Ohio’s public employers, HB 473 would ensure that pension contributions are transparent and in line with the goals of shared responsibility, all while not hurting local governments’ ability to offer attractive compensation packages to remain competitive with today’s workforce.  

The post Ohio House Bill 473 could fix public pension plan contributions appeared first on Reason Foundation.

PEPRA has saved billions, but it still needs decades to get California on track

The California Public Employees’ Retirement System, CalPERS, estimates that PEPRA has saved the state more than $5 billion since its inception. Another $25 billion in savings is estimated over the next 10 years, but only if members reject AB1383 and guard the shared PEPRA commitments.

How AB 1383 would undermine the PEPRA reforms:

• It expands the definition of pensionable compensation for all California pensions, granting large—and expensive—benefit bumps for the state’s top-earning government workers.
• It removes critical cost-sharing requirements that have shielded taxpayers from paying for all unexpected pension costs. The bill would allow employers to pay part of employees’ required contributions, which would undermine the shared limit set by PEPRA and disrupt the careful balance of responsibility established by the 2012 reform.
• It makes special exceptions for public safety workers, reducing their retirement age from 57 to 55, and granting them a new level of higher-cost benefits. It also changes rules to allow public safety employers to move all of their existing members into this new, higher-level benefit.

AB 1383 would cost taxpayers more than $9 billion

State taxpayers are already heavily burdened by the costs of public pension enhancements going back to 1999. According to CalPERS, AB 1383 would add an additional $9 billion over the next 20 years. The ultimate cost to taxpayers could extend well beyond that if market results resemble those of the last 20 years, or CalPERS continues its prudent lowering of its expected rate of return on investments.

Bottom line

Assembly Bill 1383 rolls back crucial elements of the landmark PEPRA reform, which would impose billions in extra costs on the state’s already stretched taxpayers. California needs to stay the course with PEPRA and fully fund its pensions before promising richer benefits.

Download the full backgrounder:

The post Assembly Bill 1383 brings back major pension costs for California appeared first on Reason Foundation.

At the federal level, despite Congress and the Trump administration recently passing a bill that will add trillions to the $37 trillion national debt, President Donald Trump has also moved to cut some spending by extending a federal hiring freeze through mid-October 2025. Even after this date, federal agencies will be restricted to hiring one new employee for every four departures, in an effort to reduce the size of their workforce. This push to downsize the federal workforce gained recent momentum when the Supreme Court lifted a lower-court injunction, clearing the way for federal layoffs under an executive order issued in February. The Supreme Court ruling affirms the administration’s authority to proceed with large-scale job cuts across various departments, including agriculture, state, commerce, and health and human services.

At the state and local level, governments must typically address their budget deficits. Louisiana Gov. Jeff Landry issued an executive order instituting a hiring freeze across all state government departments and agencies. The measure aims to achieve approximately $20 million in annual savings to address revenue shortfalls and protect essential services.

In Colorado, Gov. Jared Polis proposed hiring freezes and reductions in state programs to address an anticipated $1 billion deficit, driven by economic conditions, recent tax breaks, and rising Medicaid costs.

At the local level, Los Angeles Mayor Karen Bass unveiled a proposed $13.9 billion municipal budget for fiscal year 2025-26, which includes more than 1,600 layoffs and the consolidation of four city departments to eliminate a nearly $1 billion deficit.

Orange County, California, interim Chief Executive Officer Michelle Aguirre ordered department heads to implement a hiring freeze, reduce discretionary spending, and lower service levels over a three-month period.

This pattern of tightening public sector payrolls across all levels of government could contribute to a larger long-term trend that public pension systems need to monitor and address. Hiring freezes and workforce reductions could create a technical challenge for public pension plans: When payroll growth falls short of actuarial assumptions, it can lead to an underestimation of the amount of money that needs to be saved today to pay for pension benefits promised to workers.

Pension systems rely on an assumed rate of payroll growth to calculate their annually required contributions. Most systems use a “level-percent of payroll amortization method,” which bases their contribution planning on the assumption that future payroll growth and salaries will increase at a level rate. When actual payrolls fail to grow at the assumed rate, the calculations used to determine a government’s contributions to the pension plan end up short of what is actually needed.

Missing on this assumption leads to unforeseen unfunded liabilities (pension debt) and necessitates future cost increases. To avoid this, public pension plans need to either lower their payroll growth assumptions or transition to a method that is less sensitive to payroll fluctuations.

One method that some pension systems have adopted to insulate their plans from this particular risk is to remove the payroll growth assumption altogether. This can be done by switching from the “level-percent” amortization method to the “level-dollar” approach when calculating the annual required contributions. Using a “level-dollar” approach means that plan actuaries simply apply the dollar amount needed to amortize pension debt without connecting this payment to the assumed payroll. This results in a more secure method of pension funding, as it means that, at the very least, the plan has one less assumption imposing risks for underfunding.

Adopting a “level-dollar” amortization method can be done in several ways. Michigan lawmakers directed their pension for teachers to use a level-dollar method to amortize any debt on their new tier of benefits in 2017.

Arizona’s plan for public safety employees applied a level-dollar policy with a new tier of benefits beginning in 2017, and all tiers began using level-dollar for any new debt starting in 2020. By removing the payroll increase assumption from their amortization calculations, these plans have removed the impact that an increasingly volatile and unpredictable hiring rate has on their long-term funding viability.

Workforce reductions are necessary, but they also raise potential technical challenges for public pension systems. The impact of these trends can be lessened by pension plans making proactive changes to payroll assumptions. To uphold both fiscal sustainability and the retirement promises made to public workers, state and local governments should consider adjusting their payroll growth assumptions or removing them altogether from the funding calculation by adopting level-dollar amortization policies.

The post How government workforce reductions can impact public pension debt appeared first on Reason Foundation.

Articles, Research & Spotlights 

• How to Properly Structure a Cash Balance Plan for Public Workers
• Reason Advises Mississippi Lawmakers on Pension Funding Options 
• Examining Potential Improvements to Oklahoma’s DC Plan

News in Brief
Quotable Quotes on Pension Reform
Data Highlight

Articles, Research & Spotlights

New Study: Best Practices in Cash Balance Plan Design

Cash balance plans have become an increasingly popular method to provide public employees with individualized retirement accounts sheltered from some of the volatility and risks of the investment market. As the latest addition to Reason Foundation’s “Gold Standard in Public Retirement Design Series,” the Pension Integrity Project has released a paper and a video interview describing and prescribing the best ways to structure a cash balance plan. Structured as a guide to policymakers, the report reveals that the stability and adequacy of cash balance plans hinge on specific design choices, most notably the interest crediting formula, which is the main factor affecting employer risk. The study also outlines proper funding policies and gives several examples of the cash balance plans used around the country.

Recommendations for Mississippi’s Public Employees Retirement System Post-Tier 5

Mississippi lawmakers made real progress last session by creating a new tier of risk-balanced benefits (Tier 5) for the Public Employee Retirement System. But they’re not done yet. Now they need to figure out how to adequately fund the old pension plan to prevent insolvency and avoid dumping massive costs on future taxpayers. On that subject, Reason Foundation’s Steven Gassenberger was invited to speak before a special legislative committee. Reason’s actuarial modeling showed that Tier 5 reform will help by slowing the growth of unfunded liabilities, but it won’t solve the underlying funding crisis. The analysis shows that without a significant commitment of additional funding into the plan there remains a looming risk of insolvency within the next 20 years. Seeking to guide policymakers through a challenging fiscal quagmire, Reason proposes adopting a gradual adoption of adequate annual contributions that adjust to the evolving needs of PERS.

Evaluating Public Employee Defined Contribution Options in Oklahoma

In 2014, Oklahoma lawmakers made the defined contribution (DC) Pathfinder plan the only available retirement plan for government employees (excluding public safety and educators). Now, a decade later, the legislature held a hearing to evaluate how the reform has been working and identify improvements to build on the Pathfinder plan’s solid foundation. Reason Foundation’s Zachary Christensen and Rod Crane presented their findings before members of the joint pension committee, benchmarking the Pathfinder plan to others around the country. They outlined how policymakers could strengthen the plan by clarifying its objectives, modernizing investment options, and adding in-plan annuity options that would give retirees a lifetime guaranteed income.

News in Brief

Analysis Shows Chicago’s Pension Debt Rivaling Most U.S. States

A new analysis from LyLena Estabine at the Illinois Policy Institute overviews the huge public pension funding challenge facing Chicago, where the pension crisis has reached staggering proportions. Across the city’s five major pension systems—municipal, laborers, police, fire, and teachers—total unfunded liabilities have ballooned to $53 billion. To put that figure in perspective, Chicago owes more in pension debt than the governments of 44 entire states. Of the 10 worst-funded local government pension systems, Chicago claims seven of the plans, with the Chicago firefighters’ plan being the worst-funded at 23.7%. Pension debt is creating a massive burden for Chicago taxpayers. More than 80% of the city’s property tax goes to public pensions, and tax increases have nearly all gone to the increased costs generated by pension debts.  You can read the complete analysis here.

Investment Experts Record 11.3% Average Return for Pensions in 2025

Investment consulting firm Callan has released a new report indicating a median return of 11.3% for public pension plans with fiscal years ending in June 2025. This return result would exceed the average pension plan’s assumed rate of return of 7%, which means plans are expected to see an improvement in their funded ratios and a reduction in unfunded pension liabilities compared to the previous year. Most pension plans smooth out return results over multiple years, so it will take several years for government plans to realize the full impact of this one year of returns. The actual change in funding numbers will become clearer as plans release their annual reporting later this year. Read the full analysis here.

Quotable Pension Quotes 

“The return on investment work group identified the state’s retirement and health benefits systems as an area to conduct a comprehensive study to explore potential closer alignment with private sector benefit offerings and to further cost-saving methods for Iowa taxpayers. … The remarks by the task force also indicated an exemption for existing public employees paying into [Iowa Public Employees’ Retirement System] IPERS to ensure any potential future changes to IPERS would not impact existing employees.”

–Emily Schmitt, Iowa DOGE Task Force chair, quoted in “Iowa DOGE recommends big changes to IPERS. Republican leaders say, don’t count on it,” Des Moines Register, Aug. 13, 2025.

Data Highlight

Reason Foundation’s paper “Best Practices in Cash Balance Plan Design” compares how benefits accrue between a traditional cash balance plan and a traditional defined benefit pension plan. While both plan types guarantee a level of returns to employees, cash balance plans can provide an advantage in benefits generated throughout the first 30 years of employment. 

The post Pension Reform News: How to properly structure a cash balance plan for public workers appeared first on Reason Foundation.

To facilitate the process of evaluating the Mississippi Public Employees Retirement System, PERS, funding policies after the launch of a new Tier 5, the Pension Integrity Project at Reason Foundation provides the following funding analysis. Reforms made to establish a new tier of hybrid benefits (Tier 5) will have a positive impact on returning the state’s pension for public workers to full funding. Significant changes to contributions are still needed, however, or the state could face an insolvent pension and a massive burden on future taxpayers. The Pension Integrity Project offers several policies that could help Mississippi gradually adopt full actuarial funding of PERS, including segmenting the plan’s unfunded liabilities and directing future state budget surpluses to pay down the costly debt.  

Assessing the impact of Tier 5 

Consistent with the findings shared with the legislature during the 2025 Regular Session, Reason Foundation’s PERS modeling shows the positive long-term impact of Tier 5 and how it reduces future liability accrual by around $80 billion by 2074 (Figure 1).

Figure 1. MS PERS post-Tier 5 accrued liability projection 

This slowing of liability accrual is one-half of the assets versus liabilities equation upon which PERS is built. Our modeling shows that combining the new benefits with the current statutory funding policy could bring PERS to full funding at least a full decade sooner if market outcomes match plan expectations (Figure 2). If all assumptions prove 100% accurate each year over the next 50 years, and the legislature did nothing more than what it did during the 2025 Regular Session, PERS would reach 80% funded by 2062 and 100% funded in 2065. This has a significant impact on the overall costs for government employers and taxpayers compared to pre-reform. 

Figure 2. MS PERS post-Tier 5 funding projection

Conversely, this same modeling shows that PERS is still 40 years away from eliminating its unfunded liabilities, which is well above industry standards and will generate a significant level of unnecessary debt-related costs and risks for future taxpayers. Also worthy of concern is the fact that a less-than-ideal investment outcome still results in the eventual exhaustion of PERS assets. PERS is still on a very long and precarious path to achieving full funding (Figure 3). 

Figure 3. MS PERS post-Tier 5 funding projection under stress

PERS’ excessively long path to eliminating pension debt and continued vulnerability to investment underperformance, even after the prudent reforms enacted in Tier 5, is due to employer contribution rates being fixed in statute. This approach has advantages in predictable budgeting, but it also guarantees that any negative investment performance will increase unfunded liabilities and incur substantial costs over the long term. This is why most states have adopted a funding policy based on the actuarially determined contribution (or ADEC) rate that sets a final payment date for pension debt and adjusts contribution rates accordingly each year based on the system’s investment experience. 

Other states have deployed various mechanisms to overcome public pension underfunding, including layering amortization schedules and applying regular supplemental payments. Any plan facing unfunded liabilities will see significant long-term improvements and taxpayer savings from earlier additional funding. For example, Reason’s modeling indicates that an additional $110 million contributed annually over the next four years to PERS would reduce the time required to eliminate the state’s pension debt by about five years. (Figure 4)  

Any additional revenue dedicated to PERS by the legislature will reduce long-term costs, but this alone, without addressing the inflexible nature of the state’s statutory contribution policy, will not be enough to address the system’s vulnerability to market factors. This concept can be illustrated by comparing PERS post-Tier 5, both with and without an additional $110 million appropriated annually over the next four years (Figure 4). Both Mississippi House Bill 1 as is, and with nearly half a billion extra over four years, react the same when either investment assumptions prove accurate each year or when the system experiences recessions similar to those experienced over the last 20 years.  

Figure 4. MS PERS post-Tier 5 + $110 million over 4 years funding projects under stress

Looking at the same supplemental appropriation through the lens of required employer contribution rates, employers may experience some contribution relief if investment expectations prove accurate, but any investment underperformance eliminates those extra appropriations, and PERS would still face significant insolvency risk (Figure 5). The employer rate being fixed under HB1 results in the system moving into pay-as-you-go (pay-go) status, where benefits are no longer paid out of the PERS trust but out of general revenue funds. 

Figure 5. MS PERS post-Tier 5 + $110 million over 4 years contribution projects under stress

Unless legislators aim to appropriate hundreds of millions annually over the next 30 years to supplement the current fixed employer contribution rate, our modeling finds minimal fiscal gain will be achieved through supplemental contributions, both due to the sheer scale of the plan’s liabilities and PERS’ lack of responsiveness to market downturns.  

Post-Tier 5 recommendations 

The enactment of PERS Tier 5 during the 2025 regular session addressed the long-term viability of the retirement benefit. By providing a new Tier 5 benefit for new hires, lawmakers created a more balanced and risk-managed plan going forward, benefiting employees and taxpayers. While this was a necessary and positive step towards long-term sustainability, further actions are needed to address outstanding funding requirements.  

What is ADEC, and why is it the Gold Standard? 

The actuarially determined employer contribution rate, or “ADEC” rate, is the contribution rate required by employers in a given year to fully fund all accrued benefits within a predetermined timeframe.  

The majority of states fund their public pension benefits each year based on ADEC calculations using a 30-year timeframe, although that timeframe is beginning to shrink closer to the Society of Actuaries (SOA) recommended 20 years. Most states also fix the employee contribution rate in statute, resulting in the employer contribution rate  

(more tax dollars) being the only contribution rate that fluctuates in response to investment performance. Contribution rate responsiveness to market performance is key to a sustainable funding policy. The ADEC rate is the responsive mechanism by which public pension debt becomes fully funded over time. 

Currently, the Mississippi PERS employer contribution rate is fixed in statute and scheduled to increase to 19.9% by 2028. Employees will continue to contribute 9% of their salaries. As of November 2024, the ADEC rate for Tiers 1-4 benefits was calculated at 25.92% of payroll using a 30-year timeframe, according to plan actuaries. Upon review, we found the underlying assumptions used to calculate that rate generally align with industry standards. Slower government payroll growth or a lower investment return assumption are examples of assumptions that would increase the ADEC rate. 

Ways to get to ADEC over time  

Based on employer feedback and the scale of the current $26 billion PERS unfunded liability, we suggest members of the House Special Committee on PERS Funding focus on providing ways to bridge the gap between the statutory rates set in HB1 and the ADEC rate calculated annually by PERS actuaries. 

Any effort to achieve the ADEC rate of funding each year will not only better secure PERS, but it will also save taxpayers tremendous amounts of money by avoiding decades of expensive interest on the pension debt. To that end, the following three recommendations can be used as a guide to phasing in an ADEC policy. 

#1. Segment the debt 

Thanks to the legislature’s launch of the new Tier 5 benefit, members can now leverage the layered amortization approach deployed by systems and legislatures throughout the country to segment the PERS unfunded liability in three categories: Initial Legacy Debt, New Legacy Debt, and Tier 5 Debt.  

Each segment of debt comes with its own unique risks and timelines that allow legislators to incorporate different service methods. This layered approach commits the state to maintaining proper funding on any new debts without applying immediate inordinate costs associated with the current $26 billion debt.   

Initial legacy debt: All pension debt associated with tiers 1-4 as of a certain date. 

New legacy debt: All pension debt associated with tiers 1-4 after that certain date. 

Tier 5 debt: All pension debt associated with the defined benefit portion of tier 5. 

By segmenting the various tranches of debt, appropriators can tackle the more expensive long-term debt more consistently while using smaller segments of new debt to slowly transition the system to a modern ADEC funding mechanism.  

Example Segmented ADEC Policy: 

• Initial legacy debt: Amortize on a 50-year, level percent of payroll basis  

• New legacy debt: Amortize on a 50-year, level percent of payroll basis 

• Tier 5 debt: Amortize on a 25-year, level dollar, layered basis  

Applying the example above to a post-Tier 5 launch PERS, we see that the current statutory rate aligns closely with the calculated ADEC rate (Figure 6). The elongated amortization schedule applied to the initial legacy debt provides some consistency for employers managing year-to-year budgets. At the same time, the proposed example tackles new unfunded liabilities quickly enough to avoid expensive compounding interest. 

Figure 6. MS PERS post-HB1 + example ADEC contribution projects

If the same example were then subjected to economic stress, lawmakers would continue to see a need for additional appropriations, albeit on a much smaller scale. 

Figure 7. MS PERS post-HB1 + example ADEC contribution projects under stress

From a funding perspective, two recessions over the next 50 years will place a significant burden on employer contributions. Segmenting the debt does not prevent the funded ratio from falling, as evident in Figure 8, but it does prevent insolvency while maintaining an employer rate below 27% over the next 50 years, as previously shown in Figure 7. 

Figure 8. MS PERS post-HB1 + example ADEC funding projects under stress

In the end, elongating the amortization schedule and capping the employer contribution will always limit the designed effects of an ADEC policy. The lack of revenue from investment returns can only be made up by additional employer contributions or investment gains that not only meet but exceed assumptions.    

#2. Supplement the employer rate with additional appropriations.  

Separate funding sources, like interest generated by special trust funds, have been used to various degrees by legislatures to pay off debt earlier and reduce expensive interest payments. The scope and nature of these supplemental funding sources are typically unique and a result of political and fiscal conditions in the state. From a purely financial perspective, when a public pension is underfunded, any additional funding would be a net positive to the fund. However, not all supplemental funding will have the same effects on an employer’s risk profile or budget. Supplemental funding is most effective when paired with a plan to eventually meet actuarially determined rates; otherwise, the risk remains that the additional amount will not be enough to fulfill pension promises.  

Applying an additional $110 million over the next four years to the statutory rate of 19.9% of payroll as scheduled, the modeling shows only a subtle difference compared to the status quo and Example Segmented ADEC scenarios as shown in Figure 9.   

Figure 9. MS PERS post-HB1 + example ADEC + $110 million/4 years contribution projects

Figure 10. MS PERS post-HB1 + example ADEC + $110 million/4 years projects under stress

The effects of a segmented ADEC policy are most evident when market stress is applied. Figure 10 shows that the only policy that funds all benefits with a long-term employer rate below 30% is the two where the segmented ADEC policy was applied.  

The segmented ADEC policy also ensures there is always an established date when any new unfunded liabilities accrue. Figure 11 shows the effects market stress has on the PERS-funded ratios under the various conditions and policies covered previously.  

Figure 11. MS PERS post-HB1 + example ADEC + $110 million/4 years funding projects under stress

Despite two recessions over the next 50 years, the PERS funding ratio radically decreases without legislative action, but never goes insolvent due to the systematic ADEC funding rates.  

#3. Earmark 25% of future surplus funds to be deposited into the Pension Special Trust Fund to help address pension investment return volatility  

Some states (Louisiana and Connecticut, for example) have set in law that a certain percentage of surplus funds must be allocated toward the reduction of unfunded pension obligations. Others have directed volatile and non-recurring revenue to special funds designed to help pay down pension debt. Earmarking future surplus funds to pay off pension debt is a clear policy that perpetually sets the honoring of pension obligations as one of the state’s highest priorities, while requiring no up-front costs on already cash-strapped government employers. This practice can be capped by only covering any difference between the actuarially determined employer contribution rate and the PERS employer rate set in statute, but lawmakers should know that any amount contributed above ADEC will save taxpayers in the long run and accelerate the pension’s path to full funding.  

Mississippi lawmakers took an important first step in establishing a new, reduced-risk hybrid tier of benefits for new hires in 2025. Now, they need to address the ominous funding shortfall of PERS, or the plan will continue to be at risk of insolvency, and the state’s taxpayers will continue to bear the burden of massive debt-related costs. While this will require a significant commitment of state funds, there are ways to gradually adopt the proper funding policy and secure an affordable retirement benefit for Mississippi public workers into the future. 

The post Mississippi Public Employees Retirement System post-Tier 5 funding stress test and recommendations  appeared first on Reason Foundation.

Oklahoma has been a model of success in offering and administering a DC plan to public workers. In 2014, Pathfinder became the primary retirement plan for all new OPERS members. Alongside the 2011 reforms, Pathfinder played a crucial role in stabilizing and maintaining OPERS funding. 

Ten years after Oklahoma’s landmark reform, the Pension Integrity Project has evaluated ways to strengthen Oklahoma’s DC options. Pathfinder’s contribution rates meet industry standards. However, lawmakers should aim to improve the adoption rates of the optional higher contribution. 

Regarding Pathfinder vesting, employer contributions vest gradually over a five-year period (20% annually). Best practice policies call for all contributions to be vested within three years. A majority (64%) of new hires leave OPERS before their fifth year, potentially leaving them without adequate retirement savings. 

Key recommendations for Pathfinder’s modernization

Clarifying Objectives: Codifying retirement security and guaranteed lifetime income goals into law to guide the OPERS Board. 

Investment Focus: Modernizing investment options by setting a default that adjusts allocation over a career to accumulate sufficient assets for retirement income, and requiring individualized investment advice and planning. 

Lifetime Benefit Guarantee: Offering in-plan annuity options that provide guaranteed lifetime benefits, with a default distribution form securing lifetime income and survivor benefits. 

Pathfinder is a leading government-sponsored DC plan, but further modernization is needed. This includes reduced vesting requirements, investment defaults that align with retirement security goals, in-plan lifetime annuity options as the default distribution method, and a clear legal statement of “lifetime retirement income” as the plan’s ultimate objective. 

The Pension Integrity Project’s recommendations, presented to Oklahoma lawmakers, can be viewed here.

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The series offers recommendations to help states design effective retirement systems that meet the needs of both employees and taxpayers.

The Gold Standard in Public Retirement System Design Series includes:

• Best practices in the design and utilization of defined contribution plans 
• Best practices in incorporating risk sharing into defined benefit pension plans
• Best practices for cost-of-living adjustment designs in public pension systems
• Best practices in hybrid retirement plan design
• Best practices for pension debt amortization
• Best practices in optional defined contribution plans for public workers
• Best practices in cash balance plan design
• Designing an optimized retirement plan for today’s state and local government employees

If you have any questions or would like more information, please email the Reason Pension Reform Help Desk at pensionhelpdesk@reason.org.

The post The Gold Standard In Public Retirement System Design Series 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.

Articles, Research & Spotlights 

• Public Pensions Struggle to Meet Return Assumptions
• California Recruits and Retains Public Workers Without Adding Pension Benefits
• Proxy Voting Undermines Public Pensions’ Responsibility to Taxpayers

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

Articles, Research & Spotlights

Over 99% of Public Pensions Failed to Meet Their Assumed Rate of Returns

Much of the nation’s estimated $1.6 trillion in unfunded public pension liabilities was caused by investment returns falling below the expectations public pension systems set for them. When a government pension plan earns returns below its assumed rate of return, this creates a debt that the government, and ultimately taxpayers, are responsible for covering to ensure retirees get the retirement benefits they were promised. A new analysis by Reason Foundation’s Mariana Trujillo finds that nearly all public pension systems, over 99% of them, fell short of their return assumptions over the last quarter of a century. Throughout this period, pension plans have gradually reduced their expectations for investment returns, but 85% of public pension plans still maintain return rate assumptions above their 23-year averages. 

California Isn’t Having Trouble Retaining Public Workers and Shouldn’t Unwind Pension Reforms

California lawmakers are considering making significant alterations to a landmark 2012 public pension reform law. State legislators say the proposed pension benefit increase aims to help with ongoing challenges with recruiting and retaining public workers, but Mariana Trujillo’s analysis shows unwinding the pension reforms would be misguided. The reforms have saved billions and, according to data from the Bureau of Labor Statistics and California’s 2023 Total Compensation Report, California’s government workers already have a much lower turnover rate than the rest of the U.S., and this retention advantage is even more pronounced when compared to the state’s private sector workers.

Proxy Firms’ Lawsuits Highlight Need for Public Pension Systems to Prioritize Investment Returns

In response to Texas legislation that says it is trying to increase transparency on the use of public funds for political activism, the two largest proxy advisory firms, Institutional Shareholder Services and Glass Lewis, have filed a lawsuit against the state. But Reason Foundation’s Ryan Frost explains that with public pension systems faced with thousands of shareholder proposals each year, it is a problem that many 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. 

News in Brief

Survey of Cost-of-Living Adjustments in Public Pensions

A new issue brief from the National Association of State Retirement Administrators (NASRA) examines how U.S. state and local pension plans structure and fund cost-of-living adjustments (COLAs). COLAs have many shapes and sizes. Some are structured as a regular benefit; others are granted irregularly, often tied to funding requirements. Since 2009, 32 states have changed COLA provisions—17 affecting current retirees. In recent years, elevated inflation has exceeded the caps in most automatic COLA states, motivating advocacy for cost-of-living increases. The brief notes that a 3% compounded automatic COLA can add 26% to overall benefit costs, and legal challenges to COLA cuts have produced mixed results across states. It also highlights that nearly half of retired public school teachers and many public safety workers lack Social Security coverage, making inflation protection a critical aspect of retirement income adequacy. Read the full brief here.

Quotable Pension Quotes 

“I’m saying that without progressive revenue, there is not a pathway that allows us to maintain these obligations.”
–Brandon Johnson, Chicago’s mayor, quoted in “Johnson says Tier 2 enhancement for Chicago public safety retirees’ incomplete,” The Center Square Illinois, July 23, 2025.

“The rapidly shifting monetary policy and continued uncertainty throughout the market underscores the importance of a steady and long-term investment approach rooted in thoughtful diversification.”
–Steven Meier, New York City Retirement Systems CIO, quoted in “New York City Pension System Returns 10.3% in Fiscal 2025,” Chief Investment Officer, Aug. 6, 2025.

“It’s not clear whether our historic commitment to private equity will continue to realize a return premium relative to simpler, less costly and more liquid public market alternatives.”
–Rukaiyah Adams, former chair of the Oregon Investment Council, quoted in “How the managers of Oregon’s $100 billion pension fund lost big,” Lookout Eugene Springfield, Aug. 6, 2025.

Data Highlight

Reason Foundation’s Mariana Trujillo shows that from 2001 to 2023, 99% of public pension plans failed to meet their assumed rate of investment returns, averaging 6.5% in returns compared to their 7.59% assumption. This chronic failure to meet the expectations they set has contributed to the $1.6 trillion in public pension debt, which represents about one-third of all state and local government debt. See Trujillo’s complete analysis here.

The post Pension Reform News: Public pensions struggle to meet return assumptions appeared first on Reason Foundation.