In This Issue
Articles, Research & Spotlights
- Reason Foundation’s State Pension Tracker
- Texas passes another pension reform
- Public pensions’ risky entanglement with private equity
- Authority and control over public retirement plans
- Pension systems need more than additional funding
News in Brief
Quotable Quotes on Pension Reform
Contact the Pension Reform Help Desk
Articles, Research & Spotlights
With public pension systems starting to report investment returns for the fiscal year that ended June 2023, the funding outlook for state-run pensions is beginning to come into view. To contextualize these annual investment return results with the ongoing funding challenges state pension plans face, Reason Foundation’s Pension Integrity Project has developed the State Pension Tracker, an interactive tool giving users early projections on how 2023 investment returns will impact unfunded liabilities for each state and plan. Based on an estimated annual investment return of 7% for public pension plans, Reason Foundation forecasts the 118 state pension systems analyzed have $1.3 trillion in total unfunded liabilities at the end of the 2023 fiscal year. The states with the most pension debt at the end of 2023 are California ($245 billion in unfunded liabilities), Illinois ($144 billion), New Jersey ($100.6 billion), Texas ($88.8 billion), and Ohio ($68 billion). Calculations of public pension debt depend heavily on plans’ market returns, so the tool allows users to select their own return rates to see how that impacts the debt projections for a plan or state. An overview of the tool and its findings is here, and Reason’s interactive State Pension Tracker is here. As actual investment returns and unfunded liability figures are reported throughout the year, the tracker will be updated, making this a valuable tool for keeping tabs on the ongoing challenges states face in funding their public pension promises.
Following its landmark 2021 public pension reform, Texas has taken another step by securing another retirement plan offered to some public workers. Texas Senate Bill 1245, which passed unanimously this year, emulates 2021’s Senate Bill 321 by establishing a risk-reduced cash balance plan for newly hired judges. Now, the state’s judges will have the same retirement setup as the Employees Retirement System, (ERS), and most other state and local workers. Reason Foundation’s Steven Gassenberger examines how this new cash balance structure offers more flexible benefits and better serves the needs of the modern workforce while reducing the risks of runaway pension costs. He also outlines why state lawmakers must now direct their attention to the Teacher Retirement System of Texas, which has more than $51 billion in unfunded liabilities.
With high levels of debt, many public pension plans face growing pressure to attain lofty investment returns, even as traditionally safe options like bonds continue to see weaker returns. Therefore, it is no surprise that pension fund managers are turning more to alternative options like private equity, which now accounts for more than 13% of public pension systems’ investment allocation. Reason’s Mariana Trujillo explains why the pressure to dive deeper into riskier investment options comes with several potential pitfalls for workers and taxpayers.
It is the responsibility of policymakers to reform underfunded and costly public retirement plans, but this can be a challenging and thankless endeavor. Pension reformers often face significant pushback from workers, retirees, and even the trustees and staff administering the plan. Reason’s Rod Crane emphasizes that the sole responsibility and authority to establish and administer public retirement plans rests with a government’s lawmakers. Crane says state and local governments are wise to consider the concerns of all stakeholders, but for the sake of the taxpayers they serve, governments must be careful not to abdicate their legal stewardship over these retirement plans.
New research from the RAND Corporation has appropriately identified the ongoing problems of growing public pension debt, but the solution to this challenge needs to go beyond simply securing more government funding for these plans. Reason’s Richard Hiller notes that reforms to fix pension underfunding must address the causes of unfunded liabilities and the ways that public pensions have failed to adjust to the evolving needs of today’s workforce.
News in Brief
New Series Investigates Potential Solutions for Illinois’ Beleaguered Pensions
The Chicago Tribune’s opinion section has partnered with the Better Government Association on a five-part series that analyzes what has become one of Illinois’ most pernicious problems—the severe underfunding of its five pensions for public workers. The series examines the explosion of public pension costs that have created an annual bill that already takes up a quarter of the state’s annual budget and is projected to reach $19 billion, double the current cost, by 2045. The series highlights several failed attempts to right Illinois’ pensions and uncovers the massive consequences of further inaction. The author, David Greising, researches pension reforms that worked in other states, quoting Reason Foundation’s Leonard Gilroy on the importance of identifying sacrifices and detailing how Arizona’s pension reforms were agreed to by all impacted parties. The series also evaluates some of the solutions being proposed in Illinois, including calls to raise taxes, target funding levels below 100% (essentially conceding to pass on the costs of retirement promises to future generations), and risky pension obligation bonds. The entire public pension series by David Greising can be found here.
Report Discusses the Rise in Hybrid Plans to Balance Risk Exposure
The latest National Association of State Retirement Administrators Issue Brief explores the spectrum of hybrid retirement plan designs, splitting different levels of risk between employers and employees. The report comes as a growing number of pension systems have turned to defined benefit, defined contribution fusion plans to increase the long-term resilience of their plans. Public retirement plans are exposed to three main risks: investment risk, longevity risk, and inflation risk. These risks are borne by employees and/or employers, and each plan type balances these risks differently. The report shows how defined contribution plans place most retirement risk on the employee, while defined benefit plans put all risk upon the employer and taxpayers. This creates a plan design spectrum with varying degrees of risk-balancing along that axis. The full report can be found here.
Quotable Quotes on Pension Reform
“Connecticut is one of the most indebted states per capita in the nation. Unfunded pension and retiree health care program obligations, coupled with outstanding bonded debt, totaled more than $88 billion entering 2023. And nearly $40 billion of the $88 billion was unfunded pension obligations. Even with the recent supplemental payments, pension obligations and other debts are expected to place significant pressure on state finances throughout the 2030s and possibly later. The $6.5 billion Connecticut must contribute this fiscal year to retirement programs or to make required payments on bonded debt will eat up nearly 30% of the entire General Fund.”
—State Budget Reporter Keith M. Phaneuf, “CT Poised to Take Another Huge Chunk Out of Pension Debt,” CT Mirror, Sept. 12, 2023.
Each month, we feature a pension-related chart or infographic of interest generated by our team of analysts. This month, the Pension Integrity Project created an interactive dashboard that allows users to see the history and projected 2023 figures for the funding of state-sponsored pensions. Access the visualization here to see the latest state pension funding figures.
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Reason Foundation’s Pension Integrity Project has helped policymakers in states like Arizona, Colorado, Michigan, and Montana implement substantive pension reforms. Our monthly newsletter highlights the latest actuarial analysis and policy insights from our team.