Well-managed retirement systems have instituted policies to ensure that the annual contributions they receive from state governments are sufficient to achieve full funding and pay down unfunded liabilities while keeping costs stable so that the systems are sustainably funded over the long term. Using these practices as a guide, policymakers can evaluate and enhance their retirement policies.
Well-Designed Contribution Policies Can Help Achieve Funding Goals
This year, for example, Wyoming lawmakers adopted legislation requiring the state to follow an actuarial funding policy when determining annual employer contributions to the public retirement system. Retirement system officials estimated that this change would help the plan reach full funding 16 years earlier than originally anticipated and save $5 billion over the next four decades. Similarly, legislation passed last year in Montana implemented an actuarial funding policy for the state’s public safety retirement system. And Texas lawmakers adopted similar requirements in 2021—as well as a cash balance plan for new employees designed to help manage state government risks and costs—for the state’s public employee pension plan.
Effective Amortization Policies Can Promote Predictable Funding
Policies governing the amortization of pension debt can help governmental plan sponsors manage long-term costs and contain volatility in annual contributions while making sure that pension liabilities don’t increase over time. In recent years, some states have implemented actuarially recommended best practices for amortization policies.
This year, Hawaii lawmakers enacted legislation lowering the maximum period for amortizing pension liabilities from 30 years to 20 years by fiscal year 2029, which the retirement system has estimated will save $50 billion over the next two decades. Similarly, Maryland adopted a policy in 2023 to “layer” the amortization of future pension debt as it’s incurred, helping the state avoid spikes in required contributions as the retirement system nears full funding. Policymakers in Minnesota have established a working group to recommend effective amortization policies for the state’s pension plans over the coming year.
Surplus Revenues and Reserve Funds Can Help Pay Down Debt and Provide an Important Cushion
Supplemental governmental contributions to pension systems above statutorily or actuarially required minimums can help improve funding and pay down debt. Pension contributions across the 50 states have steadily increased since the Great Recession, growing by 7 percent each year from 2008 to 2021. More recently, more than a dozen states have used post-pandemic budget surpluses and excess rainy day funds to supplement their annual contributions to their public pension systems.
States continued to build on this trend in 2024. Policymakers in Alaska, California, Louisiana, and Minnesota approved supplemental contributions in budget and appropriations bills, while Kentucky lawmakers took advantage of excess reserves in the state budget, appropriating $230 million to pay down unfunded liabilities for retirement systems covering state employees, teachers, and state police.
These supplemental contributions can provide an important buffer during economic downturns and can also help achieve savings in future years. For example, Virginia state government payments to its public retirement systems above the statutorily required minimums in 2022 and 2023 helped improve pension funding and allowed the state to reduce contributions in its most recent budget. And in Connecticut, a 2017 statutory requirement directing excess budget reserves to pay down pension debt has resulted in an estimated additional state contribution of $8.5 billion since its implementation, helping save the state hundreds of millions of dollars in the coming years.
How Can States Address Pension Funding in 2025?
State policymakers will probably continue to consider proposals to improve funding for their retirement systems, and legislation that stalled in 2024 could be revisited in 2025. For example, policymakers could revisit efforts such as an Oklahoma bill to set aside surplus government funds to pay down pension debt or Illinois Governor J.B. Pritzker’s proposal to improve pension funding by setting a target date for full funding, using funds freed up from the repayment of state debt to increase annual contributions and implementing layered amortization.
Lawmakers may consider other strategies to improve funding and reduce liabilities. For example, the Illinois state comptroller recently announced that the state will begin prepaying its monthly contributions, allowing funds to be invested for a few months longer and generate additional returns for the state’s retirement systems.
State policymakers can also implement pension risk reporting tools such as stress tests, which assess the impacts of economic scenarios on funding levels and costs, to be sure that funding policies are sufficient to maintain fiscal stability and weather swings in the financial markets. Half of the states already use these tools to identify signs of distress, evaluate current policies, and inform targeted changes.
Although many states have made significant improvements to pension funding over the past decade, many plans remain underfunded and vulnerable to economic volatility. The funding policy enhancements recently adopted or considered by state legislatures can help policymakers sustainably fund retirement promises over the long term without depleting the share of government resources available for other critical priorities.
Stephanie Connolly works on Pew’s state fiscal policy project. This story was first published by the Pew Charitable Trusts. Read the original here.
