Pension Reform News: $1.3 trillion in state pension debt, shortsighted calls for divesting, and more

In This Issue

Articles, Research & Spotlights 

News in Brief
Quotable Quotes on Pension Reform
Data Highlight
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Articles, Research & Spotlights

State Pension Plans Match Record High $1.3 Trillion in Unfunded Liabilities

Reason Foundation’s Pension Integrity Project recently released its 2023 State Pension Tracker, which previews how state-run pension systems have fared over the past year. Many public pension plans won’t release official reports of their unfunded liabilities until late 2023 or early 2024, so this tool allows you to select different 2023 investment return rates to see how they would impact a state or plan’s funded ratios and debt. The latest year’s results are also presented alongside a 20-year funding history. 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. California, Illinois, New Jersey, and Texas have the most public pension debt, while Washington and New York are the only states projected to have surpluses. Kentucky and New Jersey are the states forecast to have funded ratios below 50%. Overall, these results suggest that most government pension systems still have a long path ahead to fulfill their retirement promises to teachers, police, firefighters, and other public workers, and policymakers should continue to explore reforms to do so.

Ohio Teacher Plan Offers Choice but Needs Reforms to Improve Resiliency

Ohio’s pension system for educators—the State Teacher Retirement System of Ohio (TRS)—is an innovative example of offering public teachers better options in retirement plans to help meet a wide range of potential career possibilities. New hires can choose between a traditional pension benefit, a defined contribution (DC), or a hybrid combining elements of both options. Like most other pension plans in the country, the defined benefit portion of TRS continues to face significant challenges with rising costs. Despite several previous positive pension reforms to manage runaway costs, Ohio TRS is still very vulnerable to market volatility. According to a Pension Integrity Project analysis, a single economic recession could easily pull TRS from achieving full funding, and policymakers should consider further improvements to funding policies.

Examining Calls to Bring Back Alaska’s Defined Benefit Pensions

A report from the National Institute on Retirement Security (NIRS) has added to calls to bring defined benefit pensions back for public workers in Alaska, which closed its pension plan to new workers in 2005. The analysis effectively illustrates the growing challenge of a more mobile workforce that nearly all public employers face today. Still, it does not prove that defined benefit pensions would turn the tide on this trend for Alaska. Reason’s Zachary Christensen and Jen Sidorova examine the NIRS findings and add context from several recent studies on the sentiments and patterns of public workers in Alaska and other states. Pensions, or any retirement plan type, are unlikely to solve the state’s ongoing recruitment and retention challenges, and policymakers should shift their thinking to focus on retirement plans that offer adequate benefits to all public workers, not just those who stay for decades.

Texas Legislature Should Prioritize TRS Reform in Special Session

Texas Gov. Greg Abbott called a special legislative session to focus on education policy, allowing lawmakers to address some lingering issues regarding student open enrollment and the state’s $63 billion in teacher pension debt. This Pension Integrity Project backgrounder shows the legislature has been structurally underfunding the Teacher Retirement System of Texas (TRS), and ignoring its growing debt will eventually require significant additional taxpayer dollars at both the state and local levels.

Connecticut’s Efforts to Reform Public Pensions May Add Long-Term Costs for Taxpayers

A recent reform of the Connecticut Municipal Employees Retirement System applies some cost-saving measures to relieve growing budget pressures but also makes changes that will add to the long-term costs for city and county employers. House Bill 6930 adjusts the system’s cost-of-living adjustment program and adds a deferred retirement option program, both of which could positively and negatively impact local budgets. Reason’s Ryan Frost identifies the most concerning change applied from the reform—extending the system’s amortization period from 17 to 25 years. This change may reduce annual costs upfront but will pass on significant long-term costs to future budgets.

Calls for Public Pension Systems to Divest From Energy Sector Are Shortsighted

Some environmental advocacy groups claim that it is in public pension systems’ best interests to divest from the energy sector, arguing that if they had done so in 2013, the pension plans would be in better standing with investment returns today. However, as Reason’s Jordan Campbell indicates, this analysis and limited timeframe come with many caveats and should not be viewed as a reliable predictor of the future. The period between 2013 and 2022 included a significant drop in oil prices, so it is unsurprising that energy sector investments were a net drag on investment portfolios during that narrow snapshot. Campbell argues public pension systems should maintain long-term perspectives on risks and investments and their fiduciary duty to make investment decisions in the best financial interest of their members.

News in Brief

Increased Contributions, Not Returns, Have Driven Improvement in Pension Funding Levels 

A report from the Public Sector Retirement Systems project at The Pew Charitable Trusts examines recent trends in pension contributions and funding. In 2020, for the first time in nearly two decades, state pension plans collectively surpassed the requisite contribution levels needed to honor promised benefits, a landmark reached due to persistent increases in contributions from employers and employees. From 2007 to 2020, contributions from employers surged at an annual pace of 7%, leaping from $50 billion to $130 billion. Though exceptional investment returns in 2021 gave pension plan balance sheets a boost, the subsequent turmoil in financial markets led to a 6% to 8% estimated average loss on plan investments in fiscal year 2022, erasing much or all of the gains in 2021 and bringing plan funding close to pre-pandemic levels. The growth in plan contributions was the main driver for the improvements in state pension funding ratios. The full report can be found here.

Quotable Quotes on Pension Reform 

“No one would ever be excited about losing money, but I think it’s important to think about what happened in that year and to place this all in a little bit of context…So let’s go back into that year and think about all the things that we were all reading about—really high inflation, interest rates on the rise, commodities, a simmering war in the Ukraine—so it created a really volatile environment for investing in the world. And that’s the world in which we operate.”

— Oregon State Treasurer Tobias Read quoted in “Oregon’s public pension fund lost money last year. Taxpayers may be on the hook for it,” KGW8 Oregon, Oct. 12, 2023

Data Highlight

Each month, we feature a pension-related chart or infographic of interest generated by our team of analysts. This month, Reason’s Jordan Campbell created an interactive scatter plot of 2018-22 investment alphas organized by industry to examine recent impacts on public pension returns. Access the visualization here.