The NCSL Blog

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By Anna Petrini

Nine years out from the Great Recession, some state pen­sion plans have regained their financial footing. Others never lost it. But many continue to struggle despite healthy investment returns, according to a new re­port from The Pew Charitable Trusts.

Calculator, checkbookThe report highlights three states with disciplined funding policies that have helped them withstand market volatil­ity and provide benefits that put workers on the path to retirement secu­rity. It also raises questions about how well states with severe funding woes can weather another economic downturn.

Pew collected 50-state data for pension systems in fiscal year 2017 and found a cumulative $1.28 trillion deficit—an im­provement from the $1.35 trillion gap re­ported for fiscal year 2016, but an indication that certain funds are straining to cover their obligations to employees and retirees.

Aggregate data about costs and fund­ing can belie significant variations. Public pension plans are not monolithic. They have different funding histories, face dif­ferent challenges and occupy different fis­cal positions as a result. According to Pew, Wis­consin had 103% of the assets it needed to fully fund pension liabilities in 2017. Ken­tucky? Just 34%.

Between 2012 and 2017, the median pension plan boasted investment returns over 9%. But even with a strong invest­ment performance, the worst-funded plans continued to report declines. Illi­nois, Kentucky and New Jersey saw an av­erage 15% decrease in their funded ratios.

In contrast, South Dakota, Tennes­see and Wisconsin claim funded ratios between 97% and 103% and have never dipped below 89% over the last two de­cades. How have these three states, with dif­ferent pension plan designs and funding policies, maintained such good financial posture as the recession set so many back on their heels? Pew cites two factors: full contributions in good times and in bad, and sound risk management policies that allowed them to weather volatility.

Notable features of the Wisconsin Re­tirement System include a commitment to making full actuarial contributions and a formal risk-sharing arrangement, which spreads the costs of poor investment re­turns and the benefits of solid ones be­tween employers and employees. Retir­ees’ cost of living adjustments also ratchet up or down based on investment perfor­mance and plan funding.

South Dakota’s defined benefit pension plan has fixed employee and employer contributions, and the state automatically adjusts benefits through a variable COLA.

When Tennessee saw investment gains in 2010 and 2011, it raised employer contri­butions, speeding its return to full funding and creating a funding cushion to stabilize costs when markets become volatile. In 2013, Tennessee adopted a risk-managed “hybrid” pension plan for its new employ­ees that combines a traditional defined benefit plan with a 401(k)-type defined contribution arrangement.

By minimizing pension debt, Wiscon­sin, South Dakota and Tennessee have achieved full funding with limited de­mands on taxpayer dollars. At NCSL’s recent 2019 Legislative Summit in Nashville, plan administrators from Wisconsin and Tennessee joined researchers from Pew and an array of pension experts and legal scholars as they parsed recent judicial actions, evaluated pension funding targets and analyzed trends in retirement benefit arrangements for public workers. Resources from the session, titled “Pension Pulse: Legal News Flash, Funding Goals and Cost-Sharing,” are available here.

Anna Petrini is a senior policy special in NCSL's Employment, Labor and Retirement Program.

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About the NCSL Blog

This blog offers updates on the National Conference of State Legislatures' research and training, the latest on federalism and the state legislative institution, and posts about state legislators and legislative staff. The blog is edited by NCSL staff and written primarily by NCSL's experts on public policy and the state legislative institution.