OverviewAt $124 trillion the 50-state pension funding gapmdashthe difference between a state retirement systemrsquos assets and its liabilitiesmdashimproved slightly in 2018 primarily due to strong investment performance However after a decade of economic recovery the aggregate pension funding gap remains historically high and could increase by up to $500 billion based on market returns through March 2020 including recent losses related to the COVID-19 pandemic In addition the disparity between well-funded and underfunded state retirement systems is greater than it has ever been

As policymakers anticipate another recession and increased budget pressures policies on pensions will play an important role in determining how well states are able to weather an economic downturn In this brief The Pew Charitable Trusts identifies and examines practices that can help public officials better prepare their retirement systems for a recession and help them manage through it with particular attention to proven policies followed by the best-funded states Specifically Pew finds four pension management practices that contribute to strong fiscal position

bull Following funding policies that target debt reduction

bull Lowering investment return assumptions

bull Adopting cost-sharing policies and plan designs

bull Implementing pension stress testing

The State Pension Funding Gap 2018Overall debt at historic high after economic recovery underscoring need to prepare for downturn

Juan Camilo BernalGetty Images

June 2020Brief

2

This brief assesses the effectiveness of these practices using 50-state data from 230 state retirement systems covering teachers public safety workers and other state and local public employees The findings are based on trends since before the Great Recession as well as over the five-year period since 2014 when the Governmental Accounting Standards Board (GASB) implemented new reporting standards that allow for comparable analyses of funding and cash flow across state pension plans1

Key Terms and Concepts bull Actuarial contribution Using a planrsquos own economic and demographic assumptions the calculation

of the actuarial contribution includes the expected cost of benefits earned for the current year and an amount to address the unfunded liability Under prior accounting rules the actuarially required contribution was a mandatory disclosure in governmental financial statements for all sponsors of public pension plans But starting in 2014 states instead had the option of reporting the actuarially determined employer contribution

bull Assumed rate of return The expected rate of return that a pension fund estimates its investments will deliver based on forecasts of economic growth inflation and interest rates

bull Cost-sharing features Formal mechanisms that allocate risk andor distribute unexpected costs between employers employees and retirees typically through variable benefit or contribution arrangements

bull Discount rate The discount rate is used to express future pension liabilities in todayrsquos dollars Most state pension funds determine their discount rate based on their assumed rate of return Decreasing a planrsquos discount rate leads to higher calculated liabilities

bull Employer contribution State pension plans are typically funded by contributions from participating employersmdashwhich can include the state itself as well as local governments public universities school districts and other government entities

bull Employer contribution rate Employer contributions are often expressed as a percentage of covered payroll to allocate required contributions across different participating employers and in some cases to determine the actuarial contribution This calculation also allows for the comparison of the size of pension costs across state and local government employers of different sizes

bull Funded ratio The value of a planrsquos assets in proportion to the pension liability This is an annual point-in-time measure as of the reporting date Pewrsquos analysis applies the market value of assets and the pension liability as reported by states under current government accounting standards

bull Net amortization benchmark The amount of contributions from employers and plan sponsors that would be sufficient to keep unfunded liabilities from increasing if all actuarial assumptionsmdashprimarily investment expectationsmdashwere met for the year The benchmark is calculated as the cost of new benefits earned in a given year plus the interest on the pension debt minus expected employee contributions

bull Net pension liability Current-year pension debt calculated as the difference between the total value of pension benefits owed to current and retired employees or dependents and the plan assets on hand Pension plans with assets greater than accrued liabilities show a surplus

3

Figure 1

A Growing Gap Between Assets and LiabilitiesIn 2018 states had just 71 of the assets needed to fund promised benefits

Notes Projections for 2019 and 2020 are based on past growth of service cost benefit payments and contributions as well as actual returns for FY 2019 and estimated returns for FY 2020

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Funding policies that target debt reduction are essential to plan resiliencySimple as it may sound the path to improving the fiscal health of public pension plans starts with making contributions that are sufficient to reduce unfunded pension liabilities over time And although funding policies and their application vary widely across the statesmdashsome make contributions each year based on a fixed percentage of workforce payroll while others follow actuarial funding policies that regularly adjust contribution levels based on experiencemdashplans that pay down a portion of debt each year are among the most robust

Pewrsquos net amortization metric measures whether plans are making sufficient contribution levels to reduce debt if plan assumptions are met It provides a simple and consistent benchmark to assess the effectiveness of different funding policies to improve funding levels and promote resiliency in an economic downturn The seven states with funded ratios of at least 90 in 2018 all adhered to consistent and sufficient funding policies in stark contrast to the nine states with funded ratios of less than 60

Dol

lars

bill

ions

$0

$500

$1000

$1500

$2000

$2500

$3000

$3500

$4000

$4500

$5000

201918171615141312111009080706050403

Assets Liability Projected assets Projected liability

4

Figure 2

State Pension Funding in 2018Just seven states were 90 funded while nine states were less than 60 funded

Note Numbers reflect the Governmental Accounting Standards Board reporting standards as of 2018

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Analysis of the 2018 net amortization metric shows meaningful improvement with the number of states achieving positive amortization increasing from 16 to 25 This means that if plans achieve their investment return targetsmdashcurrently averaging 72mdashhalf of states will continue to reduce pension debt and improve funding levels And although funds are likely to post investment shortfalls for the current fiscal year states that have been reducing pension debt are better positioned to weather economic uncertainty For the 25 states whose pension debt continues to rise the slowdown in the economymdashcombining lower investment returns or losses with lower state revenuesmdashwill make catching up that much more difficult

And when examined through the lens of five-year data the importance of meeting funding requirements is clear The 20 states that have exhibited positive amortization from 2014 to 2018 (that is contributed enough to pay down at least one dollar of pension debt) have lowered their unfunded liability collectively by $11 billion Conversely the remaining 30 states have reported an increase in unfunded liabilities of $281 billion

Because growing pension debt leads to higher costs states with poorly funded plans have had to increase their pension contributions And the higher cost of paying for benefits may affect the statesrsquo ability to fund other core government services and crowd out other important public investments

WY

AZ

CA

ID

UT

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NVOR

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NM

OK

TX

AR

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IA

KS

LA

MN

MONE

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SD

AK HI

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AL

IL IN

KY

MS

TN

NY

NC

OH

PA

WV

FL

GA

ME

MI

SC

VA

MA

CT

VT NH

RI

NJ

DEMD

Below 60 60-69 70-79 80-89 90-100

5

In contrast states such as Maine and West Virginia that were severely underfunded historically but subsequently adopted strong funding policies kept costs stable and pension debt shrinking through the Great Recession

Lowering return targets and discount rates reduces riskOver the past five years the average assumed rate of return for state pension fund investments has declined from 76 in 2014 to 72 in 2018 This adjustment is based on the expectation that lower economic growth will result in lower future investment performance2 In the 20 years prior to the Great Recession for example many plans averaged returns of 8 however most experts now forecast long-term returns of around 65 for the typical public plan portfolio Recognizing this new economic landscape 42 states have reduced their discount ratesmdashthe figure used to express future liabilities in todayrsquos dollarsmdashsince 2014 including 23 that did so in 2018

Lowering assumed rates of return can help plans reduce the risk of missing return targets and incurring unexpected costs during market downturns However because the present value of future liabilities is typically calculated using the assumed rate of return as the discount rate lowering the discount rate also has the immediate effect of raising calculated liabilities and contributions required from state budgets But there is evidence that plans can adopt more reasonable return assumptions without harming credit ratings or breaking the bank

For example Connecticut reduced the assumed rates of return (and discount rates) for its State Employees Retirement System and Teachersrsquo Retirement System from 8 to 69 in 2017 and 2019 respectively but the state concurrently adopted funding and amortization policies that would stabilize long-term contribution rates3 Collectively these polices help to mitigate the impact of market volatility on plan financials and the statersquos budget while also factoring positively in rating agency scoring4

Setting realistic return assumptions is critical to plan fiscal health given the importance of investment returnsmdashthey make up more than 60 of public pension plan revenue5 However adjusting return assumptions is not the only tool at policymakersrsquo disposal for mitigating economic risk Another strategy is to adopt a formal cost-sharing policy that distributes unexpected cost increasesmdashcosts that result from short- or long-term deviations from plan expectationsmdashbetween employers and plan members

Ensuring cost predictability through cost-sharingThe five years of data also demonstrate the role that cost-sharing plan provisions can play in supporting cost predictability In particular Tennessee Wisconsin and South Dakota report steady and consistent budget costs over the five-year time horizon while remaining at or near full funded status In fact these three states are the only ones in which funded status remained above 90 while pension contribution rates varied by less than 1 of payroll over the five years ending in 2018

This high level of cost predictability reflects the impact of the different cost-sharing features each state employs as part of plan benefit design in addition to consistently making full actuarial contributions each year South Dakota and Wisconsin have a long track record of using variable employee contributions or retiree cost of living adjustments (COLAs) to share the costs of investment shortfallsmdashor the benefits of strong financial marketsmdashwith employees and retirees Tennessee adopted a hybrid plan with cost-sharing policies after weathering the Great Recession

6

In comparison well-funded plans without cost-sharing features struggled to achieve both consistent costs and maintenance of funding levels over the five-year period ending in 2018 For example New York maintained a funded ratio in the high 90s between 2014 and 2018 but experienced fluctuations in employer costs as a percent of payroll of nearly 6 percentage points Data going back to 2008 show even more volatility in costs in which employer contribution rates in the state ranged from 8 to almost 22 of payroll North Carolina a well-funded state without cost-sharing had costs increase significantly over longer time periods about 6 percentage points during the 10-year period and the systemrsquos funded ratio fell by 10 percentage pointsmdashfrom 99 in 2014 to 89 in 2018

The graphic below illustrates how both New York and North Carolina two good examples of well-funded plans without cost-sharing features have experienced greater long-term volatility in costs compared with the three cost-sharing states Wisconsin Tennessee and South Dakota These states were chosen because all five are among the eight best-funded states so the differences we see here are primarily due to differences in cost-sharing features as opposed to differences in payments to address unfunded liabilities

Figure 3

Change in Employer Contribution Rates Since the Great RecessionStates with cost-sharing policies managed to minimize volatility in employer contributions

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Change between 2008 and 2018 Change between 2014 and 2018

0

2

4

6

8

WisconsinTennesseeSouth DakotaNorth CarolinaNew York

-8

-6

-4

-2

7

Pew also looks at expected employer cost going forward to determine if cost-sharing measures can further protect state budgets For example Figure 4 illustrates the employer cost variability metricmdashhow the employer cost as a percent of payroll is projected to change under a low return scenariomdashfor the five states6 Well-funded plans with cost-sharing features tend to fare better South Dakota Wisconsin and Tennessee would see zero or small changes in employer costs while North Carolina and New York experience much larger increases under the same low return scenario

Figure 4

Projected Employer Cost of New Hire Benefits as a Percentage of PayStates vary in how much cost uncertainty they face from the plan design offered to new employees

Notes Under the low return scenario the analysis assumes a 5 return The projected cost of new benefits includes contributions to the defined contribution component of the hybrid in the case of Tennesseersquos hybrid plan The analysis for each state is based on specific retirement systems including New York Employeesrsquo Retirement System Teachersrsquo and State Employeesrsquo Retirement System of North Carolina South Dakota Retirement System Tennessee Hybrid Pension Plan and the Wisconsin Retirement System

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Although cost-sharing features are not required for full funding many states have adopted variable employee contributions or variable COLAs in an effort to reduce the volatility of employer costs and limit ad hoc benefit changes Following the Great Recession many states elected to retroactively share retirement plan risk with members including in some cases reducing COLAs for retirees or increasing contributions for current workers Making cost-sharing part of the benefit design can reduce instances in which workers realize they were bearing risk after an economic downturn or other negative event had already transpired7

0 2 4 6 8 10 12 14 16 18

South Dakota SDRS

Tennessee HybridPension

Wisconsin WRS

North Carolina TSERS

New York ERS

55

57

16

0

0

Expected Low returns

8

Stress testing is emerging as an effective risk management toolMany states may not be prepared for how an economic downturn could affect the costs of their retirement systems The 2014 changes to GASB reporting requirements included a requirement that plans report sensitivity analysis related to investment returns But the requirement is limited to reporting liabilities within a narrow range of alternative investment returns of +- 1 at a single point in time Furthermore it does not require forward-looking projections that account for wider swings in investment returns or the risk of contributions falling short of the levels required by a statersquos own policies8

The experience of the past 20 years shows that states need to consider both of these risk factors more fully To better understand the risks facing state pension plans and ultimately state budgets policymakers are turning to stress testingmdashand the adoption of new actuarial standards that promote its usemdashto assess and manage investment and contribution risk

Stress testing involves the simulation of a range of economic scenarios and investment returns to determine their potential impact on future pension costs and liabilities Building on existing actuarial projections comprehensive stress testing can be a powerful tool for policymakers to understand how pension balance sheets and government budgets will fare during an economic downturn or over a period of lower-than-expected growth It also allows states to evaluate the impact of reform proposals or policy changes

Fourteen states have enacted or are considering adopting stress testing requirements And the results of stress test analyses in Colorado Connecticut and Hawaii demonstrate that this is not an academic exercise

In Colorado a 2015 stress test analysis concluded that the state faced a 1 in 4 chance that the assets in the Public Employeesrsquo Retirement Associationrsquos main fund would be depleted within 25 to 30 years The finding led to reforms that were foundmdashthrough further stress testingmdashto mitigate the risk of insolvency In Connecticut a stress test analysis in 2018 found that although reforms to the State Employees Retirement System had improved the systemrsquos fiscal health additional changes to the teachersrsquo system were needed to avoid substantial cost increases As a result policymakers made reforms to address these risks as well And in Hawaiimdashwhich has issued annual stress test reports since 2017mdashpolicymakers have used the analysis to demonstrate that recent reforms to the statersquos contribution policy have improved the planrsquos fiscal position

We expect the trend of adopting public risk reporting and stress testing to continue as state retirement systems implement the Actuarial Standard of Practice No 51 adopted by the Actuarial Standards Board in September 2017 The new standards require plan actuaries to regularly conduct an assessment of investment contribution and other risks

9

Figure 5

States That Have Enacted or Are Considering Adopting Stress Testing RequirementsTen states require stress testing or risk reporting eight have adopted it since 2017

Note Of the states that have adopted stress testing requirements by statute at least four (Washington California Virginia and Hawaii) have produced at least two stress testing reports as of January 2020 Map is as of April 2020

Source State public documents or as provided by state officials

copy 2020 The Pew Charitable Trusts

These actuarial studies can provide a comprehensive assessment of a range of risk factors including investment contribution and longevity risk But the reports are designed primarily for plan fiduciaries as opposed to a broader set of stakeholders Pewrsquos ldquoFoundation for Public Pensions Risk Reportingrdquo released in November 2018 in collaboration with the Harvard Kennedy Schoolrsquos Mossavar-Rahmani Center for Business and Government was designed to leverage these data in a standard form that is focused on impacts to taxpayers and government budget officials9 And with the impact of COVID-19 on financial markets and pension balance sheets states are already applying Pew and the centerrsquos principles of risk reporting

For example in Montana a stress test report focusing on an asset shock scenario with a significant loss on plan investments similar to the recent downturn beginning in March 2020 was used to assess the sufficiency of the statersquos funding policy entering a recession The results suggest that policymakers will face difficult decisions in terms of strengthening pension funding while revenue is projected to decline Although these decisions are challenging the stress test has provided policymakers with a clear understanding of the goals for pension reform

Risk reporting for public pensions should be accessible to all stakeholders and designed to inform planning and decision-making and to assist government officials and others as they assess the potential impact of the next recession It can be used to quantify the potential cost of investment risk on government budgets evaluate the

WY

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AK HI

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IL IN

KY

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VA

MA

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VT NH

RI

NJ

DEMD

Stress testing requirements Considering

10

impact of contribution risk on pension system financial position and provide a framework to evaluate policy proposals to strengthen state fiscal health

ConclusionAlthough many state and local pension plans are still vulnerable to market volatility and recession others have weathered past economic downturns well In the near-term state and local officials will continue to focus on the COVID-19 pandemic while navigating a host of budget challenges including declining revenue and an increased need for safety net programs As decision-makers confront these challenges a careful evaluation of successful systemsrsquo policies reveals common practices that can serve as a toolkit for policymakers to strengthen their statesrsquo pension plans over the long-term All states should consider

bull Funding at levels that target debt reduction Plans that consistently make annual payments sufficient to pay for current benefits as well as reduce a portion of pension debt are more likely to recover quickly from economic downturns and better weather recessions

bull Decreasing assumed returns and discount rates Forecasts of lower-than-historical economic growth and bond yields over the next 10 to 20 years drive the growing consensus that pension funds should plan for lower long-term investment returns than those of the past

bull Ensuring cost predictability Plans with cost-sharing features were the ones most likely to recover quickly from the downturns of the first decade of the 2000s and to maintain a strong financial position throughout the recovery

bull Employing stress testing and public risk reporting States that regularly assess whether current pension policies are sustainable throughout the economic cycle and over time have the information necessary to ensure that pension plans will be resilient during downturns

There is no one-size-fits-all solution when it comes to plan structure and design However the practices of well-funded plans of all types indicate that these four policy prescriptions can help achieve and maintain fiscal sustainability for pension balance sheets and sponsoring government balance sheets as well as ensure that benefits will be paid to the workers and retirees who depend on them

Appendix A MethodologyAll figures presented are as reported in public documents or as provided by plan officials The main data sources used were the comprehensive annual financial reports produced by each state and pension plan actuarial reports and valuations and other state documents that disclose financial details about public employment retirement systems Pew collected data for more than 230 pension plans

Pew shared the collected data with plan officials to give them an opportunity to review them and to provide additional information This feedback was incorporated into the data presented in this brief

Because of lags in valuation for many state pension plans only partial 2019 data were available and fiscal 2018 is the most recent year for which comprehensive data were available for all 50 states Data on Tennessee aggregate political subdivisions were not available for fiscal 2018 so data were rolled forward from 2017 Data on a subset of California local governments participating in the California Public Employeesrsquo Retirement System were not available in aggregate and were not included in our data

Each state retirement system uses different key assumptions and methods in presenting its financial information Pew made no adjustments or changes to the presentation of aggregate state asset or liability data for this brief

11

Assumptions underlying each statersquos funding data include the assumed rate of return on investments and estimates of employeesrsquo life spans retirement ages salary growth marriage rates retention rates and other demographic characteristics

Appendix B State data 2018In thousands

State Assets (plan net position) Liabilities (total pension liability)

Pension debt (net pension liability) Funded ratio

Alabama $38973099 $54201941 $15228842 719

Alaska $14995615 $21925093 $6929477 684

Arizona $47908905 $73124711 $25215806 655

Arkansas $28149299 $34657689 $6508389 812

California $455619154 $640471294 $184852140 711

Colorado $44906648 $76413747 $31507099 588

Connecticut $30697189 $65768148 $35070959 467

Delaware $10064363 $11825432 $1761069 851

Florida $161429344 $202133975 $40704630 799

Georgia $92155238 $115086038 $22930800 801

Hawaii $16598408 $29917401 $13318993 555

Idaho $16757951 $18138483 $1380532 924

Illinois $89823202 $230416362 $140593161 390

Indiana $28971090 $43542361 $14571271 665

Iowa $33054838 $39536464 $6481626 836

Kansas $19696209 $28596716 $8900507 689

Kentucky $23282022 $51885561 $28603539 449

Louisiana $36140052 $53731083 $17591031 673

Maine $14532362 $17197897 $2665535 845

Maryland $52125680 $74080615 $21954935 704

Massachusetts $56786732 $93728000 $36941268 606

Michigan $64647414 $102250365 $37602952 632

Minnesota $68422729 $83611446 $15188717 818

Continued on next page

12

Mississippi $28135395 $44944890 $16809495 626

Missouri $58211187 $74846702 $16635515 778

Montana $11584819 $15966542 $4381723 726

Nebraska $14256785 $15783762 $1526977 903

Nevada $41560782 $55212291 $13651509 753

New Hampshire $8894798 $13747481 $4852683 647

New Jersey $81526803 $212243893 $130717090 384

New Mexico $28373494 $46539973 $18166479 610

New York $212076811 $216315013 $4238202 980

North Carolina $97635765 $110145689 $12509924 886

North Dakota $5675354 $8705612 $3030258 652

Ohio $157058983 $207077595 $50018612 758

Oklahoma $32237217 $39635039 $7397822 813

Oregon $69327500 $84476100 $15148600 821

Pennsylvania $83300714 $152136679 $68835965 548

Rhode Island $6485178 $11966274 $5481096 542

South Carolina $31207104 $56672828 $25465724 551

South Dakota $12235719 $12233387 -$2332 1000

Tennessee $48996019 $50135354 $1139335 977

Texas $183858309 $260330851 $76472542 706

Utah $31259522 $36708181 $5448659 852

Vermont $4341722 $6760162 $2418440 642

Virginia $76555264 $96893151 $20337887 790

Washington $92610488 $98658961 $6048473 939

West Virginia $15566369 $18923489 $3357120 823

Wisconsin $96737081 $100294768 $3557687 965

Wyoming $7914035 $11556643 $3642608 685

Total $2983360762 $4221152134 $1237791374 707

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

13

State

Beginning of year net

pension liability

Assumed rate of return

(weighted average

across plans)

Assumed interest due on 2018 beginning

of year debt

2018 normal costdagger

2018 total expected

costDagger

2018 employee

contributions with interest

2018 employer

contribution benchmarksect

2018 actual employer

contributions with interest

Percent of employer

benchmark paid

Net amortization||

Alabama $15251096 775 $1181960 $954407 $2136367 $767179 $1369188 $1293504 94 -$75684

Alaska $7243003 800 $579497 $242840 $822336 $128306 $694030 $556411 80 -$137619

Arizona $27416368 774 $2122280 $1825501 $3947780 $1347511 $2600269 $2162496 83 -$437773

Arkansas $7853261 710 $557951 $534527 $1092478 $219977 $872501 $776295 89 -$96206

California $191130787 707 $13503891 $14100694 $27604585 $6762629 $20841956 $24116619 116 $3274664

Colorado $54596452 485 $2648807 $2185834 $4834641 $819995 $4014647 $1903073 47 -$2111573

Connecticut $34811035 733 $2550487 $905880 $3456367 $526637 $2929730 $2840519 97 -$89212

Delaware $1961753 631 $123883 $236947 $360830 $79153 $281677 $280407 100 -$1271

Florida $40281942 617 $2483643 $2682437 $5166080 $772653 $4393427 $3501282 80 -$892145

Georgia $22889927 749 $1714408 $1674041 $3388449 $826840 $2561609 $2857440 112 $295831

Hawaii $12950306 700 $906521 $584470 $1490992 $268354 $1222637 $876760 72 -$345878

Idaho $1506653 710 $106972 $440220 $547193 $253207 $293986 $394422 134 $100436

Illinois $136881554 696 $9523705 $3351603 $12875308 $1541872 $11333437 $8143193 72 -$3190244

Indiana $17326203 675 $1169519 $602253 $1771772 $62405 $1709366 $1989838 116 $280471

Iowa $6840464 701 $479728 $881056 $1360783 $505976 $854807 $777309 91 -$77498

Kansas $9128629 775 $707469 $552423 $1259892 $436267 $823625 $921493 112 $97868

Appendix C Net amortization details 2018In thousands

Continued on next page

14

Kentucky $42916062 457 $1962340 $1344834 $3307174 $459624 $2847550 $1885289 66 -$962261

Louisiana $18214179 767 $1396832 $754930 $2151762 $599520 $1552242 $2117818 136 $565576

Maine $2995575 688 $205946 $293786 $499732 $196064 $303668 $411397 135 $107728

Maryland $22584000 736 $1663262 $1358213 $3021475 $824117 $2197359 $2110351 96 -$87008

Massachusetts $35710159 750 $2678262 $1757434 $4435696 $1406338 $3029358 $2674071 88 -$355287

Michigan $32483291 749 $2432624 $850399 $3283024 $448739 $2834285 $3675705 130 $841420

Minnesota $37198871 570 $2118482 $2394914 $4513396 $1140576 $3372821 $1399477 41 -$1973343

Mississippi $16783124 775 $1300692 $710195 $2010887 $595085 $1415802 $1073116 76 -$342685

Missouri $15774044 758 $1196427 $1233899 $2430326 $931469 $1498857 $1582607 106 $83750

Montana $4080482 769 $313807 $257534 $571341 $211668 $359673 $362690 101 $3017

Nebraska $1474474 804 $118563 $361308 $479872 $249491 $230380 $320606 139 $90225

Nevada $13319492 750 $998962 $1138361 $2137323 $1024105 $1113217 $970167 87 -$143051

New Hampshire $4965063 725 $359849 $273264 $633113 $226092 $407022 $444277 109 $37255

New Jersey $142288433 741 $10539842 $4970779 $15510621 $2168820 $13341800 $4691558 35 -$8650242

New Mexico $16485691 641 $1056961 $879231 $1936192 $591229 $1344963 $738207 55 -$606756

New York $11468876 700 $802821 $3678776 $4481597 $361411 $4120187 $4989268 121 $869081

North Carolina $9631900 721 $694086 $2370680 $3064766 $1383612 $1681154 $2207884 131 $526731

North Dakota $2987137 706 $210885 $244878 $455763 $164401 $291362 $198577 68 -$92785

Ohio $39735633 735 $2920649 $3071713 $5992362 $3055314 $2937048 $3748626 128 $811578

Oklahoma $8548375 747 $638452 $763718 $1402170 $456570 $945600 $1326526 140 $380926

Oregon $13480000 720 $970560 $1108200 $2078760 $13046 $2065714 $1439274 70 -$626440

Continued on next page

15

Note Numbers may not be exact due to rounding

The assumed rate of return is weighted for the plans in each state by the net pension liability at the beginning of 2018

dagger The normal cost refers to the cost of benefits earned by employees in any given year Also called the service cost

Dagger The total expected cost represents the projected increase in the funding gap before taking employer and employee contributions into account It is equal to the normal cost plus the assumed interest on the unfunded liability

sect The employer contribution benchmark is the contribution level employers need to meet in order to keep pension debt from growing

|| For net amortization positive numbers mean expected progress in paying down pension debt Negative numbers mean expected growth in pension debt

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Pennsylvania $66328481 725 $4808815 $2855906 $7664721 $1470963 $6193758 $6522941 105 $329183

Rhode Island $5454061 700 $381784 $152862 $534646 $96362 $438285 $433127 99 -$5157

South Carolina $25482182 725 $1847458 $1103205 $2950663 $1046631 $1904033 $1710476 90 -$193557

South Dakota -$9075 650 -$590 $222710 $222120 $128237 $93882 $128724 137 $34842

Tennessee $1695312 731 $123939 $853550 $977488 $348831 $628657 $1141243 182 $512586

Texas $55145722 687 $3787172 $6196686 $9983858 $4210268 $5773590 $4280858 74 -$1492733

Utah $3420315 695 $237712 $642590 $880302 $37553 $842749 $1177968 140 $335219

Vermont $2283896 793 $181025 $118295 $299320 $101237 $198082 $199899 101 $1816

Virginia $21480408 700 $1503629 $1888831 $3392460 $891439 $2501020 $2554085 102 $53065

Washington $9883432 737 $728406 $1931582 $2659988 $1100150 $1559838 $2827714 181 $1267876

West Virginia $3917091 750 $293782 $281951 $575733 $164283 $411449 $678234 165 $266785

Wisconsin -$2969118 700 -$207838 $1860937 $1653099 $1006427 $646671 $1065965 165 $419294

Wyoming $2700673 671 $181154 $236862 $418016 $178956 $239060 $178228 75 -$60832

16

Appendix D Details of changes to net pension liability 2018In thousands

StateBeginning of year net

pension liability

End of year net pension

liabilityTotal changes

Net amortization benchmark

Employer + other

contributions

Net amortization

Change to reconcile

Investment experience

Benefit changes

Actuarial experience

Actuarial changes

Alabama $15251096 $15228842 -$22254 $1369188 $1293504 -$75684 -$97938 -$544500 $0 $177032 $269530

Alaska $7243003 $6929477 -$313526 $694030 $556411 -$137619 -$451145 -$17225 $0 -$433920 $0

Arizona $27416368 $25215806 -$2200562 $2600269 $2162496 -$437773 -$2638335 -$826137 -$116011 $515560 -$2211747

Arkansas $7853261 $6508389 -$1344872 $872501 $776295 -$96206 -$1441078 -$959873 $0 $34562 -$515767

California $191130787 $184852140 -$6278647 $20841956 $24116619 $3274664 -$3003983 -$3031295 $668 $2158587 -$2131943

Colorado $54596452 $31507099 -$23089353 $4014647 $1903073 -$2111573 -$25200926 $4206458 -$5980577 $889134 -$24315941

Connecticut $34811035 $35070959 $259924 $2929730 $2840519 -$89212 $170712 $74367 $510940 -$414595 $0

Delaware $1961753 $1761069 -$200684 $281677 $280407 -$1271 -$201955 -$285729 $11154 $89307 -$16687

Florida $40281942 $40704631 $422689 $4393427 $3501282 -$892145 -$469456 -$3049099 $0 $742984 $1836659

Georgia $22889927 $22930800 $40873 $2561609 $2857440 $295831 $336704 -$1164304 $72381 $1084627 $344000

Hawaii $12950306 $13318993 $368687 $1222637 $876760 -$345878 $22810 -$101944 $0 $124753 $0

Idaho $1506653 $1380532 -$126121 $293986 $394422 $100436 -$25684 -$167683 $83585 -$47697 $106111

Illinois $136881554 $140593161 $3711607 $11333437 $8143193 -$3190244 $521363 -$797304 -$374603 $731439 $961832

Indiana $17326203 $14571271 -$2754932 $1709366 $1989838 $280471 -$2474461 -$619782 $0 -$169086 -$1685593

Iowa $6840464 $6481626 -$358838 $854807 $777309 -$77498 -$436336 -$363061 -$1208 -$140228 $68161

Kansas $9128629 $8900507 -$228122 $823625 $921493 $97868 -$130254 -$83111 $0 -$47143 $0

Kentucky $42916062 $28603539 -$14312523 $2847550 $1885289 -$962261 -$15274784 -$1098415 $10513 -$19567 -$14167315

Louisiana $18214179 $17591031 -$623148 $1552242 $2117818 $565576 -$57572 -$696779 $658 -$195920 $834469

Continued on next page

17

Maine $2995575 $2665535 -$330041 $303668 $411397 $107728 -$222312 -$391240 -$106123 $35815 $239236

Maryland $22584000 $21954935 -$629065 $2197359 $2110351 -$87008 -$716073 -$185256 $5505 -$653748 $117426

Massachusetts $35710159 $36941268 $1231109 $3029358 $2674071 -$355287 $875822 -$785503 $0 $194325 $1467000

Michigan $32483291 $37602953 $5119662 $2834285 $3675705 $841420 $5961081 -$2089131 $0 -$64336 $8114548

Minnesota $37198871 $15188717 -$22010154 $3372821 $1399477 -$1973343 -$23983497 -$2573005 -$5765677 $1583 -$15646398

Mississippi $16783124 $16809495 $26371 $1415802 $1073116 -$342685 -$316314 -$354928 $0 $38614 $0

Missouri $15774044 $16635515 $861471 $1498857 $1582607 $83750 $945221 -$404892 -$8 -$7407 $1357528

Montana $4080482 $4381723 $301241 $359673 $362690 $3017 $304258 -$109601 $0 $207538 $206321

Nebraska $1474474 $1526977 $52503 $230380 $320606 $90225 $142728 $119428 $88636 -$65335 $0

Nevada $13319492 $13651509 $332017 $1113217 $970167 -$143051 $188966 -$315116 $0 $504082 $0

New Hampshire

$4965063 $4852683 -$112380 $407022 $444277 $37255 -$75125 -$108669 $0 $29109 $4435

New Jersey $142288433 $130717090 -$11571343 $13341800 $4691558 -$8650242 -$20221585 -$6169156 $0 $850491 -$14902920

New Mexico $16485691 $18166479 $1680788 $1344963 $738207 -$606756 $1074032 -$58134 $0 -$74477 $1206643

New York $11468876 $4238202 -$7230674 $4120187 $4989268 $869081 -$6361593 -$7838038 $0 $1476445 $0

North Carolina $9631900 $12509924 $2878024 $1681154 $2207884 $526731 $3404755 -$100834 $44793 $1199449 $2261347

North Dakota $2987137 $3030258 $43121 $291362 $198577 -$92785 -$49665 -$86485 $0 -$94216 $131036

Ohio $39735633 $50018612 $10282979 $2937048 $3748626 $811578 $11094557 $7711615 $0 -$307530 $3690472

Oklahoma $8548375 $7397822 -$1150553 $945600 $1326526 $380926 -$769626 -$575769 -$113763 -$105401 $25307

Oregon $13480000 $15148600 $1668600 $2065714 $1439274 -$626440 $1042160 -$1272440 $0 $74300 $2240300

Pennsylvania $66328481 $68835965 $2507484 $6193758 $6522941 $329183 $2836667 $3414973 $0 -$578306 $0

Rhode Island $5454061 $5481096 $27035 $438285 $433127 -$5157 $21877 -$50633 $0 $72627 -$116

South Carolina $25482182 $25465724 -$16458 $1904033 $1710476 -$193557 -$210015 -$136380 $0 -$73635 $0

Continued on next page

18

Sources Comprehensive annual financial reports actuarial reports and valuations or other public documents or as provided by plan

copy 2020 The Pew Charitable Trusts

Appendix E Debt driversStatesrsquo improved fiscal position in 2018 was driven by strong investment returnsmdash86 for those reporting on a fiscal year ending June 30mdashthat exceeded plan assumptions On their own investment returns lowered the cumulative funding gap by more than $10 billion although this reduction was offset by insufficient contributions Average performance through the following fiscal year ending June 30 2019 was under 710 Economic conditions in the third quarter of fiscal year 2020 point to a shortfall in meeting investment targets and an increase in unfunded liabilities of up to $500 billion nine months through the fiscal year

States cannot rely on investment income alone to chip away at their accumulated pension debt Pew has collected annual financial data on state-run pension systems since before the recession But even after a decade of economic recovery states have made limited progress in paying down pension debt In fact since 2007 the shortfall between actual contributions to state pension plans and minimum actuarial funding standards was $200 billion11

Changes to plan assumptions also decreased reported liabilities by $30 billion in 2018 however that result is driven by Colorado Kentucky Minnesota and New Jersey where improvements in funded status allowed plans to substantially increase their discount rates The remaining 46 states reported an increase in liabilities of $39 billion from assumption changes

South Dakota -$9075 -$2332 $6743 $93882 $128724 $34842 $41585 -$145567 $0 $5221 $181932

Tennessee $1695312 $1139335 -$555977 $628657 $1141243 $512586 -$43391 -$606253 $17316 -$32315 $577861

Texas $55145722 $76472542 $21326821 $5773590 $4280858 -$1492733 $19834088 -$274164 $2825 $68677 $20036750

Utah $3420315 $5448659 $2028344 $842749 $1177968 $335219 $2363563 $2338849 $0 $24714 $0

Vermont $2283896 $2418440 $134544 $198082 $199899 $1816 $136361 $12217 $194 $156907 -$32957

Virginia $21480408 $20337887 -$1142521 $2501020 $2554085 $53065 -$1089456 -$240348 $10811 -$859919 $0

Washington $9883432 $6048473 -$3834959 $1559838 $2827714 $1267876 -$2567083 -$1546224 $175100 -$118086 -$1077873

West Virginia $3917091 $3357120 -$559971 $411449 $678234 $266785 -$293186 -$279644 $0 -$14504 $962

Wisconsin -$2969118 $3557687 $6526805 $646671 $1065965 $419294 $6946099 $11552920 $0 -$4968302 $361481

Wyoming $2700673 $3642608 $941935 $239060 $178228 -$60832 $881102 $882867 $0 -$67752 $65987

Total $1276007674 $1237791374 -$38216300 $126118030 $114658013 -$11460017 -$49676317 -$10189958 -$11422892 $1934455 -$29997922

19

Change in Pension DebtStrong investment performance and changes in assumptions reduced reported pension debt by $10 billion and $30 billion respectively

Source Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Appendix F Net amortization benchmarkThe benchmark is calculated by taking the sum of service cost (the actuarial value of the benefits earned in 2018 also called normal cost) and interest on the net pension liability at the beginning of the year (each pension planrsquos total pension liability and the net pension liability both grow annually at the planrsquos assumed rate of return) and subtracting employee contributions Employer and employee contributions are adjusted to reflect expected interest After subtracting the $43 billion contributed by workers nationwide in 2018 (including interest) employers would have needed to contribute $126 billion to meet the net amortization benchmark to keep pension debt from growing To actually make progress on closing the funding gap states would have to exceed the contribution benchmark on a consistent basis

In b

illio

ns

$0

$200

$400

$600

$800

$1000

$1200

$1400

2018 netpension liability

Other factorsNetamortization

Changes inassumptions

Investmentgains

2017 netpension liability

$1276 -$10 -$30 -$9$11 $1238

For further information please visit pewtrustsorgpensions

Contact Sarah Jones communications officer Email sjonespewtrustsorg Project website pewtrustsorgpensions

The Pew Charitable Trusts is driven by the power of knowledge to solve todayrsquos most challenging problems Pew applies a rigorous analytical approach to improve public policy inform the public and invigorate civic life

Endnotes1 See Appendix F for more information on the net amortization benchmark

2 For example the US experienced annual gross domestic product (GDP) growth of more than 55 from 1988 through 2007 while the Congressional Budget Office now projects only 4 annual growth for the next decade See Congressional Budget Office ldquoThe Budget and Economic Outlook 2019 to 2029rdquo (2019) httpswwwcbogovsstemfiles2019-0354918-Outlook-3pdf

3 See SEBAC 2017 Agreement httpaftctorgsitesaftctorgfilessebac_2017_ta_signedpdf for details on Connecticut State Employees Retirement System (SERS) pension reforms

4 See Fitch Ratings ldquoConnecticut Teacher Pension Changes Costly but Lower Fiscal Risksrdquo Feb 28 2019 httpswwwfitchratingscomsitepr10064878

5 National Association of State Retirement Administrators ldquoNASRA Issue Brief Public Pension Plan Investment Return Assumptionsrdquo (updated April 2014) httpwwwnasraorgfilesIssue20BriefsNASRAInvReturnAssumptBriefpdf

6 Low return scenario assumes a 5 return

7 K Brainard and A Brown ldquoIn-Depth Risk Sharing in Public Retirement Plansrdquo (National Association of State Retirement Administrators 2018)

8 GASB Statement 67 on Financial Reporting for Pension Plans does also require an adjustment to the discount rate assumptionsmdashresulting in a higher reported pension liabilitymdashif current contribution policies are deemed insufficient However as of 2018 reporting only nine of the largest 100 plans across the 50 states are required to make this adjustment down from 15 in 2017

9 The Pew Charitable Trusts ldquoFoundation for Public Pensions Risk Reportingrdquo (2018) httpswwwhksharvardedusitesdefaultfilescentersmrcbgprogramsFoundation20for20Pensions20Risk20Reporting20(Strawman)pdf

10 Wilshire Trust Universe Comparison Service and Wilshire TUCS are service marks of Wilshire Associates Inc (ldquoWilshirerdquo) and have been licensed for use by The Pew Charitable Trusts All content of Wilshire TUCS is copyright 2019 Wilshire Associates Inc all rights reserved

11 Accounting standards changed in 2014 From 2007 to 2013 the shortfall is calculated between the actuarial recommended contribution and actual employer contributions From 2014 to 2018 the shortfall represents the gap between the net amortization benchmark and employer contributions

2

This brief assesses the effectiveness of these practices using 50-state data from 230 state retirement systems covering teachers public safety workers and other state and local public employees The findings are based on trends since before the Great Recession as well as over the five-year period since 2014 when the Governmental Accounting Standards Board (GASB) implemented new reporting standards that allow for comparable analyses of funding and cash flow across state pension plans1

Key Terms and Concepts bull Actuarial contribution Using a planrsquos own economic and demographic assumptions the calculation

of the actuarial contribution includes the expected cost of benefits earned for the current year and an amount to address the unfunded liability Under prior accounting rules the actuarially required contribution was a mandatory disclosure in governmental financial statements for all sponsors of public pension plans But starting in 2014 states instead had the option of reporting the actuarially determined employer contribution

bull Assumed rate of return The expected rate of return that a pension fund estimates its investments will deliver based on forecasts of economic growth inflation and interest rates

bull Cost-sharing features Formal mechanisms that allocate risk andor distribute unexpected costs between employers employees and retirees typically through variable benefit or contribution arrangements

bull Discount rate The discount rate is used to express future pension liabilities in todayrsquos dollars Most state pension funds determine their discount rate based on their assumed rate of return Decreasing a planrsquos discount rate leads to higher calculated liabilities

bull Employer contribution State pension plans are typically funded by contributions from participating employersmdashwhich can include the state itself as well as local governments public universities school districts and other government entities

bull Employer contribution rate Employer contributions are often expressed as a percentage of covered payroll to allocate required contributions across different participating employers and in some cases to determine the actuarial contribution This calculation also allows for the comparison of the size of pension costs across state and local government employers of different sizes

bull Funded ratio The value of a planrsquos assets in proportion to the pension liability This is an annual point-in-time measure as of the reporting date Pewrsquos analysis applies the market value of assets and the pension liability as reported by states under current government accounting standards

bull Net amortization benchmark The amount of contributions from employers and plan sponsors that would be sufficient to keep unfunded liabilities from increasing if all actuarial assumptionsmdashprimarily investment expectationsmdashwere met for the year The benchmark is calculated as the cost of new benefits earned in a given year plus the interest on the pension debt minus expected employee contributions

bull Net pension liability Current-year pension debt calculated as the difference between the total value of pension benefits owed to current and retired employees or dependents and the plan assets on hand Pension plans with assets greater than accrued liabilities show a surplus

3

Figure 1

A Growing Gap Between Assets and LiabilitiesIn 2018 states had just 71 of the assets needed to fund promised benefits

Notes Projections for 2019 and 2020 are based on past growth of service cost benefit payments and contributions as well as actual returns for FY 2019 and estimated returns for FY 2020

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Funding policies that target debt reduction are essential to plan resiliencySimple as it may sound the path to improving the fiscal health of public pension plans starts with making contributions that are sufficient to reduce unfunded pension liabilities over time And although funding policies and their application vary widely across the statesmdashsome make contributions each year based on a fixed percentage of workforce payroll while others follow actuarial funding policies that regularly adjust contribution levels based on experiencemdashplans that pay down a portion of debt each year are among the most robust

Pewrsquos net amortization metric measures whether plans are making sufficient contribution levels to reduce debt if plan assumptions are met It provides a simple and consistent benchmark to assess the effectiveness of different funding policies to improve funding levels and promote resiliency in an economic downturn The seven states with funded ratios of at least 90 in 2018 all adhered to consistent and sufficient funding policies in stark contrast to the nine states with funded ratios of less than 60

Dol

lars

bill

ions

$0

$500

$1000

$1500

$2000

$2500

$3000

$3500

$4000

$4500

$5000

201918171615141312111009080706050403

Assets Liability Projected assets Projected liability

4

Figure 2

State Pension Funding in 2018Just seven states were 90 funded while nine states were less than 60 funded

Note Numbers reflect the Governmental Accounting Standards Board reporting standards as of 2018

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Analysis of the 2018 net amortization metric shows meaningful improvement with the number of states achieving positive amortization increasing from 16 to 25 This means that if plans achieve their investment return targetsmdashcurrently averaging 72mdashhalf of states will continue to reduce pension debt and improve funding levels And although funds are likely to post investment shortfalls for the current fiscal year states that have been reducing pension debt are better positioned to weather economic uncertainty For the 25 states whose pension debt continues to rise the slowdown in the economymdashcombining lower investment returns or losses with lower state revenuesmdashwill make catching up that much more difficult

And when examined through the lens of five-year data the importance of meeting funding requirements is clear The 20 states that have exhibited positive amortization from 2014 to 2018 (that is contributed enough to pay down at least one dollar of pension debt) have lowered their unfunded liability collectively by $11 billion Conversely the remaining 30 states have reported an increase in unfunded liabilities of $281 billion

Because growing pension debt leads to higher costs states with poorly funded plans have had to increase their pension contributions And the higher cost of paying for benefits may affect the statesrsquo ability to fund other core government services and crowd out other important public investments

WY

AZ

CA

ID

UT

MT

NVOR

WA

NM

OK

TX

AR

CO

IA

KS

LA

MN

MONE

ND

SD

AK HI

WI

AL

IL IN

KY

MS

TN

NY

NC

OH

PA

WV

FL

GA

ME

MI

SC

VA

MA

CT

VT NH

RI

NJ

DEMD

Below 60 60-69 70-79 80-89 90-100

5

In contrast states such as Maine and West Virginia that were severely underfunded historically but subsequently adopted strong funding policies kept costs stable and pension debt shrinking through the Great Recession

Lowering return targets and discount rates reduces riskOver the past five years the average assumed rate of return for state pension fund investments has declined from 76 in 2014 to 72 in 2018 This adjustment is based on the expectation that lower economic growth will result in lower future investment performance2 In the 20 years prior to the Great Recession for example many plans averaged returns of 8 however most experts now forecast long-term returns of around 65 for the typical public plan portfolio Recognizing this new economic landscape 42 states have reduced their discount ratesmdashthe figure used to express future liabilities in todayrsquos dollarsmdashsince 2014 including 23 that did so in 2018

Lowering assumed rates of return can help plans reduce the risk of missing return targets and incurring unexpected costs during market downturns However because the present value of future liabilities is typically calculated using the assumed rate of return as the discount rate lowering the discount rate also has the immediate effect of raising calculated liabilities and contributions required from state budgets But there is evidence that plans can adopt more reasonable return assumptions without harming credit ratings or breaking the bank

For example Connecticut reduced the assumed rates of return (and discount rates) for its State Employees Retirement System and Teachersrsquo Retirement System from 8 to 69 in 2017 and 2019 respectively but the state concurrently adopted funding and amortization policies that would stabilize long-term contribution rates3 Collectively these polices help to mitigate the impact of market volatility on plan financials and the statersquos budget while also factoring positively in rating agency scoring4

Setting realistic return assumptions is critical to plan fiscal health given the importance of investment returnsmdashthey make up more than 60 of public pension plan revenue5 However adjusting return assumptions is not the only tool at policymakersrsquo disposal for mitigating economic risk Another strategy is to adopt a formal cost-sharing policy that distributes unexpected cost increasesmdashcosts that result from short- or long-term deviations from plan expectationsmdashbetween employers and plan members

Ensuring cost predictability through cost-sharingThe five years of data also demonstrate the role that cost-sharing plan provisions can play in supporting cost predictability In particular Tennessee Wisconsin and South Dakota report steady and consistent budget costs over the five-year time horizon while remaining at or near full funded status In fact these three states are the only ones in which funded status remained above 90 while pension contribution rates varied by less than 1 of payroll over the five years ending in 2018

This high level of cost predictability reflects the impact of the different cost-sharing features each state employs as part of plan benefit design in addition to consistently making full actuarial contributions each year South Dakota and Wisconsin have a long track record of using variable employee contributions or retiree cost of living adjustments (COLAs) to share the costs of investment shortfallsmdashor the benefits of strong financial marketsmdashwith employees and retirees Tennessee adopted a hybrid plan with cost-sharing policies after weathering the Great Recession

6

In comparison well-funded plans without cost-sharing features struggled to achieve both consistent costs and maintenance of funding levels over the five-year period ending in 2018 For example New York maintained a funded ratio in the high 90s between 2014 and 2018 but experienced fluctuations in employer costs as a percent of payroll of nearly 6 percentage points Data going back to 2008 show even more volatility in costs in which employer contribution rates in the state ranged from 8 to almost 22 of payroll North Carolina a well-funded state without cost-sharing had costs increase significantly over longer time periods about 6 percentage points during the 10-year period and the systemrsquos funded ratio fell by 10 percentage pointsmdashfrom 99 in 2014 to 89 in 2018

The graphic below illustrates how both New York and North Carolina two good examples of well-funded plans without cost-sharing features have experienced greater long-term volatility in costs compared with the three cost-sharing states Wisconsin Tennessee and South Dakota These states were chosen because all five are among the eight best-funded states so the differences we see here are primarily due to differences in cost-sharing features as opposed to differences in payments to address unfunded liabilities

Figure 3

Change in Employer Contribution Rates Since the Great RecessionStates with cost-sharing policies managed to minimize volatility in employer contributions

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Change between 2008 and 2018 Change between 2014 and 2018

0

2

4

6

8

WisconsinTennesseeSouth DakotaNorth CarolinaNew York

-8

-6

-4

-2

7

Pew also looks at expected employer cost going forward to determine if cost-sharing measures can further protect state budgets For example Figure 4 illustrates the employer cost variability metricmdashhow the employer cost as a percent of payroll is projected to change under a low return scenariomdashfor the five states6 Well-funded plans with cost-sharing features tend to fare better South Dakota Wisconsin and Tennessee would see zero or small changes in employer costs while North Carolina and New York experience much larger increases under the same low return scenario

Figure 4

Projected Employer Cost of New Hire Benefits as a Percentage of PayStates vary in how much cost uncertainty they face from the plan design offered to new employees

Notes Under the low return scenario the analysis assumes a 5 return The projected cost of new benefits includes contributions to the defined contribution component of the hybrid in the case of Tennesseersquos hybrid plan The analysis for each state is based on specific retirement systems including New York Employeesrsquo Retirement System Teachersrsquo and State Employeesrsquo Retirement System of North Carolina South Dakota Retirement System Tennessee Hybrid Pension Plan and the Wisconsin Retirement System

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Although cost-sharing features are not required for full funding many states have adopted variable employee contributions or variable COLAs in an effort to reduce the volatility of employer costs and limit ad hoc benefit changes Following the Great Recession many states elected to retroactively share retirement plan risk with members including in some cases reducing COLAs for retirees or increasing contributions for current workers Making cost-sharing part of the benefit design can reduce instances in which workers realize they were bearing risk after an economic downturn or other negative event had already transpired7

0 2 4 6 8 10 12 14 16 18

South Dakota SDRS

Tennessee HybridPension

Wisconsin WRS

North Carolina TSERS

New York ERS

55

57

16

0

0

Expected Low returns

8

Stress testing is emerging as an effective risk management toolMany states may not be prepared for how an economic downturn could affect the costs of their retirement systems The 2014 changes to GASB reporting requirements included a requirement that plans report sensitivity analysis related to investment returns But the requirement is limited to reporting liabilities within a narrow range of alternative investment returns of +- 1 at a single point in time Furthermore it does not require forward-looking projections that account for wider swings in investment returns or the risk of contributions falling short of the levels required by a statersquos own policies8

The experience of the past 20 years shows that states need to consider both of these risk factors more fully To better understand the risks facing state pension plans and ultimately state budgets policymakers are turning to stress testingmdashand the adoption of new actuarial standards that promote its usemdashto assess and manage investment and contribution risk

Stress testing involves the simulation of a range of economic scenarios and investment returns to determine their potential impact on future pension costs and liabilities Building on existing actuarial projections comprehensive stress testing can be a powerful tool for policymakers to understand how pension balance sheets and government budgets will fare during an economic downturn or over a period of lower-than-expected growth It also allows states to evaluate the impact of reform proposals or policy changes

Fourteen states have enacted or are considering adopting stress testing requirements And the results of stress test analyses in Colorado Connecticut and Hawaii demonstrate that this is not an academic exercise

In Colorado a 2015 stress test analysis concluded that the state faced a 1 in 4 chance that the assets in the Public Employeesrsquo Retirement Associationrsquos main fund would be depleted within 25 to 30 years The finding led to reforms that were foundmdashthrough further stress testingmdashto mitigate the risk of insolvency In Connecticut a stress test analysis in 2018 found that although reforms to the State Employees Retirement System had improved the systemrsquos fiscal health additional changes to the teachersrsquo system were needed to avoid substantial cost increases As a result policymakers made reforms to address these risks as well And in Hawaiimdashwhich has issued annual stress test reports since 2017mdashpolicymakers have used the analysis to demonstrate that recent reforms to the statersquos contribution policy have improved the planrsquos fiscal position

We expect the trend of adopting public risk reporting and stress testing to continue as state retirement systems implement the Actuarial Standard of Practice No 51 adopted by the Actuarial Standards Board in September 2017 The new standards require plan actuaries to regularly conduct an assessment of investment contribution and other risks

9

Figure 5

States That Have Enacted or Are Considering Adopting Stress Testing RequirementsTen states require stress testing or risk reporting eight have adopted it since 2017

Note Of the states that have adopted stress testing requirements by statute at least four (Washington California Virginia and Hawaii) have produced at least two stress testing reports as of January 2020 Map is as of April 2020

Source State public documents or as provided by state officials

copy 2020 The Pew Charitable Trusts

These actuarial studies can provide a comprehensive assessment of a range of risk factors including investment contribution and longevity risk But the reports are designed primarily for plan fiduciaries as opposed to a broader set of stakeholders Pewrsquos ldquoFoundation for Public Pensions Risk Reportingrdquo released in November 2018 in collaboration with the Harvard Kennedy Schoolrsquos Mossavar-Rahmani Center for Business and Government was designed to leverage these data in a standard form that is focused on impacts to taxpayers and government budget officials9 And with the impact of COVID-19 on financial markets and pension balance sheets states are already applying Pew and the centerrsquos principles of risk reporting

For example in Montana a stress test report focusing on an asset shock scenario with a significant loss on plan investments similar to the recent downturn beginning in March 2020 was used to assess the sufficiency of the statersquos funding policy entering a recession The results suggest that policymakers will face difficult decisions in terms of strengthening pension funding while revenue is projected to decline Although these decisions are challenging the stress test has provided policymakers with a clear understanding of the goals for pension reform

Risk reporting for public pensions should be accessible to all stakeholders and designed to inform planning and decision-making and to assist government officials and others as they assess the potential impact of the next recession It can be used to quantify the potential cost of investment risk on government budgets evaluate the

WY

AZ

CA

ID

UT

MT

NVOR

WA

NM

OK

TX

AR

CO

IA

KS

LA

MN

MONE

ND

SD

AK HI

WI

AL

IL IN

KY

MS

TN

NY

NC

OH

PA

WV

FL

GA

ME

MI

SC

VA

MA

CT

VT NH

RI

NJ

DEMD

Stress testing requirements Considering

10

impact of contribution risk on pension system financial position and provide a framework to evaluate policy proposals to strengthen state fiscal health

ConclusionAlthough many state and local pension plans are still vulnerable to market volatility and recession others have weathered past economic downturns well In the near-term state and local officials will continue to focus on the COVID-19 pandemic while navigating a host of budget challenges including declining revenue and an increased need for safety net programs As decision-makers confront these challenges a careful evaluation of successful systemsrsquo policies reveals common practices that can serve as a toolkit for policymakers to strengthen their statesrsquo pension plans over the long-term All states should consider

bull Funding at levels that target debt reduction Plans that consistently make annual payments sufficient to pay for current benefits as well as reduce a portion of pension debt are more likely to recover quickly from economic downturns and better weather recessions

bull Decreasing assumed returns and discount rates Forecasts of lower-than-historical economic growth and bond yields over the next 10 to 20 years drive the growing consensus that pension funds should plan for lower long-term investment returns than those of the past

bull Ensuring cost predictability Plans with cost-sharing features were the ones most likely to recover quickly from the downturns of the first decade of the 2000s and to maintain a strong financial position throughout the recovery

bull Employing stress testing and public risk reporting States that regularly assess whether current pension policies are sustainable throughout the economic cycle and over time have the information necessary to ensure that pension plans will be resilient during downturns

There is no one-size-fits-all solution when it comes to plan structure and design However the practices of well-funded plans of all types indicate that these four policy prescriptions can help achieve and maintain fiscal sustainability for pension balance sheets and sponsoring government balance sheets as well as ensure that benefits will be paid to the workers and retirees who depend on them

Appendix A MethodologyAll figures presented are as reported in public documents or as provided by plan officials The main data sources used were the comprehensive annual financial reports produced by each state and pension plan actuarial reports and valuations and other state documents that disclose financial details about public employment retirement systems Pew collected data for more than 230 pension plans

Pew shared the collected data with plan officials to give them an opportunity to review them and to provide additional information This feedback was incorporated into the data presented in this brief

Because of lags in valuation for many state pension plans only partial 2019 data were available and fiscal 2018 is the most recent year for which comprehensive data were available for all 50 states Data on Tennessee aggregate political subdivisions were not available for fiscal 2018 so data were rolled forward from 2017 Data on a subset of California local governments participating in the California Public Employeesrsquo Retirement System were not available in aggregate and were not included in our data

Each state retirement system uses different key assumptions and methods in presenting its financial information Pew made no adjustments or changes to the presentation of aggregate state asset or liability data for this brief

11

Assumptions underlying each statersquos funding data include the assumed rate of return on investments and estimates of employeesrsquo life spans retirement ages salary growth marriage rates retention rates and other demographic characteristics

Appendix B State data 2018In thousands

State Assets (plan net position) Liabilities (total pension liability)

Pension debt (net pension liability) Funded ratio

Alabama $38973099 $54201941 $15228842 719

Alaska $14995615 $21925093 $6929477 684

Arizona $47908905 $73124711 $25215806 655

Arkansas $28149299 $34657689 $6508389 812

California $455619154 $640471294 $184852140 711

Colorado $44906648 $76413747 $31507099 588

Connecticut $30697189 $65768148 $35070959 467

Delaware $10064363 $11825432 $1761069 851

Florida $161429344 $202133975 $40704630 799

Georgia $92155238 $115086038 $22930800 801

Hawaii $16598408 $29917401 $13318993 555

Idaho $16757951 $18138483 $1380532 924

Illinois $89823202 $230416362 $140593161 390

Indiana $28971090 $43542361 $14571271 665

Iowa $33054838 $39536464 $6481626 836

Kansas $19696209 $28596716 $8900507 689

Kentucky $23282022 $51885561 $28603539 449

Louisiana $36140052 $53731083 $17591031 673

Maine $14532362 $17197897 $2665535 845

Maryland $52125680 $74080615 $21954935 704

Massachusetts $56786732 $93728000 $36941268 606

Michigan $64647414 $102250365 $37602952 632

Minnesota $68422729 $83611446 $15188717 818

Continued on next page

12

Mississippi $28135395 $44944890 $16809495 626

Missouri $58211187 $74846702 $16635515 778

Montana $11584819 $15966542 $4381723 726

Nebraska $14256785 $15783762 $1526977 903

Nevada $41560782 $55212291 $13651509 753

New Hampshire $8894798 $13747481 $4852683 647

New Jersey $81526803 $212243893 $130717090 384

New Mexico $28373494 $46539973 $18166479 610

New York $212076811 $216315013 $4238202 980

North Carolina $97635765 $110145689 $12509924 886

North Dakota $5675354 $8705612 $3030258 652

Ohio $157058983 $207077595 $50018612 758

Oklahoma $32237217 $39635039 $7397822 813

Oregon $69327500 $84476100 $15148600 821

Pennsylvania $83300714 $152136679 $68835965 548

Rhode Island $6485178 $11966274 $5481096 542

South Carolina $31207104 $56672828 $25465724 551

South Dakota $12235719 $12233387 -$2332 1000

Tennessee $48996019 $50135354 $1139335 977

Texas $183858309 $260330851 $76472542 706

Utah $31259522 $36708181 $5448659 852

Vermont $4341722 $6760162 $2418440 642

Virginia $76555264 $96893151 $20337887 790

Washington $92610488 $98658961 $6048473 939

West Virginia $15566369 $18923489 $3357120 823

Wisconsin $96737081 $100294768 $3557687 965

Wyoming $7914035 $11556643 $3642608 685

Total $2983360762 $4221152134 $1237791374 707

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

13

State

Beginning of year net

pension liability

Assumed rate of return

(weighted average

across plans)

Assumed interest due on 2018 beginning

of year debt

2018 normal costdagger

2018 total expected

costDagger

2018 employee

contributions with interest

2018 employer

contribution benchmarksect

2018 actual employer

contributions with interest

Percent of employer

benchmark paid

Net amortization||

Alabama $15251096 775 $1181960 $954407 $2136367 $767179 $1369188 $1293504 94 -$75684

Alaska $7243003 800 $579497 $242840 $822336 $128306 $694030 $556411 80 -$137619

Arizona $27416368 774 $2122280 $1825501 $3947780 $1347511 $2600269 $2162496 83 -$437773

Arkansas $7853261 710 $557951 $534527 $1092478 $219977 $872501 $776295 89 -$96206

California $191130787 707 $13503891 $14100694 $27604585 $6762629 $20841956 $24116619 116 $3274664

Colorado $54596452 485 $2648807 $2185834 $4834641 $819995 $4014647 $1903073 47 -$2111573

Connecticut $34811035 733 $2550487 $905880 $3456367 $526637 $2929730 $2840519 97 -$89212

Delaware $1961753 631 $123883 $236947 $360830 $79153 $281677 $280407 100 -$1271

Florida $40281942 617 $2483643 $2682437 $5166080 $772653 $4393427 $3501282 80 -$892145

Georgia $22889927 749 $1714408 $1674041 $3388449 $826840 $2561609 $2857440 112 $295831

Hawaii $12950306 700 $906521 $584470 $1490992 $268354 $1222637 $876760 72 -$345878

Idaho $1506653 710 $106972 $440220 $547193 $253207 $293986 $394422 134 $100436

Illinois $136881554 696 $9523705 $3351603 $12875308 $1541872 $11333437 $8143193 72 -$3190244

Indiana $17326203 675 $1169519 $602253 $1771772 $62405 $1709366 $1989838 116 $280471

Iowa $6840464 701 $479728 $881056 $1360783 $505976 $854807 $777309 91 -$77498

Kansas $9128629 775 $707469 $552423 $1259892 $436267 $823625 $921493 112 $97868

Appendix C Net amortization details 2018In thousands

Continued on next page

14

Kentucky $42916062 457 $1962340 $1344834 $3307174 $459624 $2847550 $1885289 66 -$962261

Louisiana $18214179 767 $1396832 $754930 $2151762 $599520 $1552242 $2117818 136 $565576

Maine $2995575 688 $205946 $293786 $499732 $196064 $303668 $411397 135 $107728

Maryland $22584000 736 $1663262 $1358213 $3021475 $824117 $2197359 $2110351 96 -$87008

Massachusetts $35710159 750 $2678262 $1757434 $4435696 $1406338 $3029358 $2674071 88 -$355287

Michigan $32483291 749 $2432624 $850399 $3283024 $448739 $2834285 $3675705 130 $841420

Minnesota $37198871 570 $2118482 $2394914 $4513396 $1140576 $3372821 $1399477 41 -$1973343

Mississippi $16783124 775 $1300692 $710195 $2010887 $595085 $1415802 $1073116 76 -$342685

Missouri $15774044 758 $1196427 $1233899 $2430326 $931469 $1498857 $1582607 106 $83750

Montana $4080482 769 $313807 $257534 $571341 $211668 $359673 $362690 101 $3017

Nebraska $1474474 804 $118563 $361308 $479872 $249491 $230380 $320606 139 $90225

Nevada $13319492 750 $998962 $1138361 $2137323 $1024105 $1113217 $970167 87 -$143051

New Hampshire $4965063 725 $359849 $273264 $633113 $226092 $407022 $444277 109 $37255

New Jersey $142288433 741 $10539842 $4970779 $15510621 $2168820 $13341800 $4691558 35 -$8650242

New Mexico $16485691 641 $1056961 $879231 $1936192 $591229 $1344963 $738207 55 -$606756

New York $11468876 700 $802821 $3678776 $4481597 $361411 $4120187 $4989268 121 $869081

North Carolina $9631900 721 $694086 $2370680 $3064766 $1383612 $1681154 $2207884 131 $526731

North Dakota $2987137 706 $210885 $244878 $455763 $164401 $291362 $198577 68 -$92785

Ohio $39735633 735 $2920649 $3071713 $5992362 $3055314 $2937048 $3748626 128 $811578

Oklahoma $8548375 747 $638452 $763718 $1402170 $456570 $945600 $1326526 140 $380926

Oregon $13480000 720 $970560 $1108200 $2078760 $13046 $2065714 $1439274 70 -$626440

Continued on next page

15

Note Numbers may not be exact due to rounding

The assumed rate of return is weighted for the plans in each state by the net pension liability at the beginning of 2018

dagger The normal cost refers to the cost of benefits earned by employees in any given year Also called the service cost

Dagger The total expected cost represents the projected increase in the funding gap before taking employer and employee contributions into account It is equal to the normal cost plus the assumed interest on the unfunded liability

sect The employer contribution benchmark is the contribution level employers need to meet in order to keep pension debt from growing

|| For net amortization positive numbers mean expected progress in paying down pension debt Negative numbers mean expected growth in pension debt

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Pennsylvania $66328481 725 $4808815 $2855906 $7664721 $1470963 $6193758 $6522941 105 $329183

Rhode Island $5454061 700 $381784 $152862 $534646 $96362 $438285 $433127 99 -$5157

South Carolina $25482182 725 $1847458 $1103205 $2950663 $1046631 $1904033 $1710476 90 -$193557

South Dakota -$9075 650 -$590 $222710 $222120 $128237 $93882 $128724 137 $34842

Tennessee $1695312 731 $123939 $853550 $977488 $348831 $628657 $1141243 182 $512586

Texas $55145722 687 $3787172 $6196686 $9983858 $4210268 $5773590 $4280858 74 -$1492733

Utah $3420315 695 $237712 $642590 $880302 $37553 $842749 $1177968 140 $335219

Vermont $2283896 793 $181025 $118295 $299320 $101237 $198082 $199899 101 $1816

Virginia $21480408 700 $1503629 $1888831 $3392460 $891439 $2501020 $2554085 102 $53065

Washington $9883432 737 $728406 $1931582 $2659988 $1100150 $1559838 $2827714 181 $1267876

West Virginia $3917091 750 $293782 $281951 $575733 $164283 $411449 $678234 165 $266785

Wisconsin -$2969118 700 -$207838 $1860937 $1653099 $1006427 $646671 $1065965 165 $419294

Wyoming $2700673 671 $181154 $236862 $418016 $178956 $239060 $178228 75 -$60832

16

Appendix D Details of changes to net pension liability 2018In thousands

StateBeginning of year net

pension liability

End of year net pension

liabilityTotal changes

Net amortization benchmark

Employer + other

contributions

Net amortization

Change to reconcile

Investment experience

Benefit changes

Actuarial experience

Actuarial changes

Alabama $15251096 $15228842 -$22254 $1369188 $1293504 -$75684 -$97938 -$544500 $0 $177032 $269530

Alaska $7243003 $6929477 -$313526 $694030 $556411 -$137619 -$451145 -$17225 $0 -$433920 $0

Arizona $27416368 $25215806 -$2200562 $2600269 $2162496 -$437773 -$2638335 -$826137 -$116011 $515560 -$2211747

Arkansas $7853261 $6508389 -$1344872 $872501 $776295 -$96206 -$1441078 -$959873 $0 $34562 -$515767

California $191130787 $184852140 -$6278647 $20841956 $24116619 $3274664 -$3003983 -$3031295 $668 $2158587 -$2131943

Colorado $54596452 $31507099 -$23089353 $4014647 $1903073 -$2111573 -$25200926 $4206458 -$5980577 $889134 -$24315941

Connecticut $34811035 $35070959 $259924 $2929730 $2840519 -$89212 $170712 $74367 $510940 -$414595 $0

Delaware $1961753 $1761069 -$200684 $281677 $280407 -$1271 -$201955 -$285729 $11154 $89307 -$16687

Florida $40281942 $40704631 $422689 $4393427 $3501282 -$892145 -$469456 -$3049099 $0 $742984 $1836659

Georgia $22889927 $22930800 $40873 $2561609 $2857440 $295831 $336704 -$1164304 $72381 $1084627 $344000

Hawaii $12950306 $13318993 $368687 $1222637 $876760 -$345878 $22810 -$101944 $0 $124753 $0

Idaho $1506653 $1380532 -$126121 $293986 $394422 $100436 -$25684 -$167683 $83585 -$47697 $106111

Illinois $136881554 $140593161 $3711607 $11333437 $8143193 -$3190244 $521363 -$797304 -$374603 $731439 $961832

Indiana $17326203 $14571271 -$2754932 $1709366 $1989838 $280471 -$2474461 -$619782 $0 -$169086 -$1685593

Iowa $6840464 $6481626 -$358838 $854807 $777309 -$77498 -$436336 -$363061 -$1208 -$140228 $68161

Kansas $9128629 $8900507 -$228122 $823625 $921493 $97868 -$130254 -$83111 $0 -$47143 $0

Kentucky $42916062 $28603539 -$14312523 $2847550 $1885289 -$962261 -$15274784 -$1098415 $10513 -$19567 -$14167315

Louisiana $18214179 $17591031 -$623148 $1552242 $2117818 $565576 -$57572 -$696779 $658 -$195920 $834469

Continued on next page

17

Maine $2995575 $2665535 -$330041 $303668 $411397 $107728 -$222312 -$391240 -$106123 $35815 $239236

Maryland $22584000 $21954935 -$629065 $2197359 $2110351 -$87008 -$716073 -$185256 $5505 -$653748 $117426

Massachusetts $35710159 $36941268 $1231109 $3029358 $2674071 -$355287 $875822 -$785503 $0 $194325 $1467000

Michigan $32483291 $37602953 $5119662 $2834285 $3675705 $841420 $5961081 -$2089131 $0 -$64336 $8114548

Minnesota $37198871 $15188717 -$22010154 $3372821 $1399477 -$1973343 -$23983497 -$2573005 -$5765677 $1583 -$15646398

Mississippi $16783124 $16809495 $26371 $1415802 $1073116 -$342685 -$316314 -$354928 $0 $38614 $0

Missouri $15774044 $16635515 $861471 $1498857 $1582607 $83750 $945221 -$404892 -$8 -$7407 $1357528

Montana $4080482 $4381723 $301241 $359673 $362690 $3017 $304258 -$109601 $0 $207538 $206321

Nebraska $1474474 $1526977 $52503 $230380 $320606 $90225 $142728 $119428 $88636 -$65335 $0

Nevada $13319492 $13651509 $332017 $1113217 $970167 -$143051 $188966 -$315116 $0 $504082 $0

New Hampshire

$4965063 $4852683 -$112380 $407022 $444277 $37255 -$75125 -$108669 $0 $29109 $4435

New Jersey $142288433 $130717090 -$11571343 $13341800 $4691558 -$8650242 -$20221585 -$6169156 $0 $850491 -$14902920

New Mexico $16485691 $18166479 $1680788 $1344963 $738207 -$606756 $1074032 -$58134 $0 -$74477 $1206643

New York $11468876 $4238202 -$7230674 $4120187 $4989268 $869081 -$6361593 -$7838038 $0 $1476445 $0

North Carolina $9631900 $12509924 $2878024 $1681154 $2207884 $526731 $3404755 -$100834 $44793 $1199449 $2261347

North Dakota $2987137 $3030258 $43121 $291362 $198577 -$92785 -$49665 -$86485 $0 -$94216 $131036

Ohio $39735633 $50018612 $10282979 $2937048 $3748626 $811578 $11094557 $7711615 $0 -$307530 $3690472

Oklahoma $8548375 $7397822 -$1150553 $945600 $1326526 $380926 -$769626 -$575769 -$113763 -$105401 $25307

Oregon $13480000 $15148600 $1668600 $2065714 $1439274 -$626440 $1042160 -$1272440 $0 $74300 $2240300

Pennsylvania $66328481 $68835965 $2507484 $6193758 $6522941 $329183 $2836667 $3414973 $0 -$578306 $0

Rhode Island $5454061 $5481096 $27035 $438285 $433127 -$5157 $21877 -$50633 $0 $72627 -$116

South Carolina $25482182 $25465724 -$16458 $1904033 $1710476 -$193557 -$210015 -$136380 $0 -$73635 $0

Continued on next page

18

Sources Comprehensive annual financial reports actuarial reports and valuations or other public documents or as provided by plan

copy 2020 The Pew Charitable Trusts

Appendix E Debt driversStatesrsquo improved fiscal position in 2018 was driven by strong investment returnsmdash86 for those reporting on a fiscal year ending June 30mdashthat exceeded plan assumptions On their own investment returns lowered the cumulative funding gap by more than $10 billion although this reduction was offset by insufficient contributions Average performance through the following fiscal year ending June 30 2019 was under 710 Economic conditions in the third quarter of fiscal year 2020 point to a shortfall in meeting investment targets and an increase in unfunded liabilities of up to $500 billion nine months through the fiscal year

States cannot rely on investment income alone to chip away at their accumulated pension debt Pew has collected annual financial data on state-run pension systems since before the recession But even after a decade of economic recovery states have made limited progress in paying down pension debt In fact since 2007 the shortfall between actual contributions to state pension plans and minimum actuarial funding standards was $200 billion11

Changes to plan assumptions also decreased reported liabilities by $30 billion in 2018 however that result is driven by Colorado Kentucky Minnesota and New Jersey where improvements in funded status allowed plans to substantially increase their discount rates The remaining 46 states reported an increase in liabilities of $39 billion from assumption changes

South Dakota -$9075 -$2332 $6743 $93882 $128724 $34842 $41585 -$145567 $0 $5221 $181932

Tennessee $1695312 $1139335 -$555977 $628657 $1141243 $512586 -$43391 -$606253 $17316 -$32315 $577861

Texas $55145722 $76472542 $21326821 $5773590 $4280858 -$1492733 $19834088 -$274164 $2825 $68677 $20036750

Utah $3420315 $5448659 $2028344 $842749 $1177968 $335219 $2363563 $2338849 $0 $24714 $0

Vermont $2283896 $2418440 $134544 $198082 $199899 $1816 $136361 $12217 $194 $156907 -$32957

Virginia $21480408 $20337887 -$1142521 $2501020 $2554085 $53065 -$1089456 -$240348 $10811 -$859919 $0

Washington $9883432 $6048473 -$3834959 $1559838 $2827714 $1267876 -$2567083 -$1546224 $175100 -$118086 -$1077873

West Virginia $3917091 $3357120 -$559971 $411449 $678234 $266785 -$293186 -$279644 $0 -$14504 $962

Wisconsin -$2969118 $3557687 $6526805 $646671 $1065965 $419294 $6946099 $11552920 $0 -$4968302 $361481

Wyoming $2700673 $3642608 $941935 $239060 $178228 -$60832 $881102 $882867 $0 -$67752 $65987

Total $1276007674 $1237791374 -$38216300 $126118030 $114658013 -$11460017 -$49676317 -$10189958 -$11422892 $1934455 -$29997922

19

Change in Pension DebtStrong investment performance and changes in assumptions reduced reported pension debt by $10 billion and $30 billion respectively

Source Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Appendix F Net amortization benchmarkThe benchmark is calculated by taking the sum of service cost (the actuarial value of the benefits earned in 2018 also called normal cost) and interest on the net pension liability at the beginning of the year (each pension planrsquos total pension liability and the net pension liability both grow annually at the planrsquos assumed rate of return) and subtracting employee contributions Employer and employee contributions are adjusted to reflect expected interest After subtracting the $43 billion contributed by workers nationwide in 2018 (including interest) employers would have needed to contribute $126 billion to meet the net amortization benchmark to keep pension debt from growing To actually make progress on closing the funding gap states would have to exceed the contribution benchmark on a consistent basis

In b

illio

ns

$0

$200

$400

$600

$800

$1000

$1200

$1400

2018 netpension liability

Other factorsNetamortization

Changes inassumptions

Investmentgains

2017 netpension liability

$1276 -$10 -$30 -$9$11 $1238

For further information please visit pewtrustsorgpensions

Contact Sarah Jones communications officer Email sjonespewtrustsorg Project website pewtrustsorgpensions

The Pew Charitable Trusts is driven by the power of knowledge to solve todayrsquos most challenging problems Pew applies a rigorous analytical approach to improve public policy inform the public and invigorate civic life

Endnotes1 See Appendix F for more information on the net amortization benchmark

2 For example the US experienced annual gross domestic product (GDP) growth of more than 55 from 1988 through 2007 while the Congressional Budget Office now projects only 4 annual growth for the next decade See Congressional Budget Office ldquoThe Budget and Economic Outlook 2019 to 2029rdquo (2019) httpswwwcbogovsstemfiles2019-0354918-Outlook-3pdf

3 See SEBAC 2017 Agreement httpaftctorgsitesaftctorgfilessebac_2017_ta_signedpdf for details on Connecticut State Employees Retirement System (SERS) pension reforms

4 See Fitch Ratings ldquoConnecticut Teacher Pension Changes Costly but Lower Fiscal Risksrdquo Feb 28 2019 httpswwwfitchratingscomsitepr10064878

5 National Association of State Retirement Administrators ldquoNASRA Issue Brief Public Pension Plan Investment Return Assumptionsrdquo (updated April 2014) httpwwwnasraorgfilesIssue20BriefsNASRAInvReturnAssumptBriefpdf

6 Low return scenario assumes a 5 return

7 K Brainard and A Brown ldquoIn-Depth Risk Sharing in Public Retirement Plansrdquo (National Association of State Retirement Administrators 2018)

8 GASB Statement 67 on Financial Reporting for Pension Plans does also require an adjustment to the discount rate assumptionsmdashresulting in a higher reported pension liabilitymdashif current contribution policies are deemed insufficient However as of 2018 reporting only nine of the largest 100 plans across the 50 states are required to make this adjustment down from 15 in 2017

9 The Pew Charitable Trusts ldquoFoundation for Public Pensions Risk Reportingrdquo (2018) httpswwwhksharvardedusitesdefaultfilescentersmrcbgprogramsFoundation20for20Pensions20Risk20Reporting20(Strawman)pdf

10 Wilshire Trust Universe Comparison Service and Wilshire TUCS are service marks of Wilshire Associates Inc (ldquoWilshirerdquo) and have been licensed for use by The Pew Charitable Trusts All content of Wilshire TUCS is copyright 2019 Wilshire Associates Inc all rights reserved

11 Accounting standards changed in 2014 From 2007 to 2013 the shortfall is calculated between the actuarial recommended contribution and actual employer contributions From 2014 to 2018 the shortfall represents the gap between the net amortization benchmark and employer contributions

3

Figure 1

A Growing Gap Between Assets and LiabilitiesIn 2018 states had just 71 of the assets needed to fund promised benefits

Notes Projections for 2019 and 2020 are based on past growth of service cost benefit payments and contributions as well as actual returns for FY 2019 and estimated returns for FY 2020

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Funding policies that target debt reduction are essential to plan resiliencySimple as it may sound the path to improving the fiscal health of public pension plans starts with making contributions that are sufficient to reduce unfunded pension liabilities over time And although funding policies and their application vary widely across the statesmdashsome make contributions each year based on a fixed percentage of workforce payroll while others follow actuarial funding policies that regularly adjust contribution levels based on experiencemdashplans that pay down a portion of debt each year are among the most robust

Pewrsquos net amortization metric measures whether plans are making sufficient contribution levels to reduce debt if plan assumptions are met It provides a simple and consistent benchmark to assess the effectiveness of different funding policies to improve funding levels and promote resiliency in an economic downturn The seven states with funded ratios of at least 90 in 2018 all adhered to consistent and sufficient funding policies in stark contrast to the nine states with funded ratios of less than 60

Dol

lars

bill

ions

$0

$500

$1000

$1500

$2000

$2500

$3000

$3500

$4000

$4500

$5000

201918171615141312111009080706050403

Assets Liability Projected assets Projected liability

4

Figure 2

State Pension Funding in 2018Just seven states were 90 funded while nine states were less than 60 funded

Note Numbers reflect the Governmental Accounting Standards Board reporting standards as of 2018

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Analysis of the 2018 net amortization metric shows meaningful improvement with the number of states achieving positive amortization increasing from 16 to 25 This means that if plans achieve their investment return targetsmdashcurrently averaging 72mdashhalf of states will continue to reduce pension debt and improve funding levels And although funds are likely to post investment shortfalls for the current fiscal year states that have been reducing pension debt are better positioned to weather economic uncertainty For the 25 states whose pension debt continues to rise the slowdown in the economymdashcombining lower investment returns or losses with lower state revenuesmdashwill make catching up that much more difficult

And when examined through the lens of five-year data the importance of meeting funding requirements is clear The 20 states that have exhibited positive amortization from 2014 to 2018 (that is contributed enough to pay down at least one dollar of pension debt) have lowered their unfunded liability collectively by $11 billion Conversely the remaining 30 states have reported an increase in unfunded liabilities of $281 billion

Because growing pension debt leads to higher costs states with poorly funded plans have had to increase their pension contributions And the higher cost of paying for benefits may affect the statesrsquo ability to fund other core government services and crowd out other important public investments

WY

AZ

CA

ID

UT

MT

NVOR

WA

NM

OK

TX

AR

CO

IA

KS

LA

MN

MONE

ND

SD

AK HI

WI

AL

IL IN

KY

MS

TN

NY

NC

OH

PA

WV

FL

GA

ME

MI

SC

VA

MA

CT

VT NH

RI

NJ

DEMD

Below 60 60-69 70-79 80-89 90-100

5

In contrast states such as Maine and West Virginia that were severely underfunded historically but subsequently adopted strong funding policies kept costs stable and pension debt shrinking through the Great Recession

Lowering return targets and discount rates reduces riskOver the past five years the average assumed rate of return for state pension fund investments has declined from 76 in 2014 to 72 in 2018 This adjustment is based on the expectation that lower economic growth will result in lower future investment performance2 In the 20 years prior to the Great Recession for example many plans averaged returns of 8 however most experts now forecast long-term returns of around 65 for the typical public plan portfolio Recognizing this new economic landscape 42 states have reduced their discount ratesmdashthe figure used to express future liabilities in todayrsquos dollarsmdashsince 2014 including 23 that did so in 2018

Lowering assumed rates of return can help plans reduce the risk of missing return targets and incurring unexpected costs during market downturns However because the present value of future liabilities is typically calculated using the assumed rate of return as the discount rate lowering the discount rate also has the immediate effect of raising calculated liabilities and contributions required from state budgets But there is evidence that plans can adopt more reasonable return assumptions without harming credit ratings or breaking the bank

For example Connecticut reduced the assumed rates of return (and discount rates) for its State Employees Retirement System and Teachersrsquo Retirement System from 8 to 69 in 2017 and 2019 respectively but the state concurrently adopted funding and amortization policies that would stabilize long-term contribution rates3 Collectively these polices help to mitigate the impact of market volatility on plan financials and the statersquos budget while also factoring positively in rating agency scoring4

Setting realistic return assumptions is critical to plan fiscal health given the importance of investment returnsmdashthey make up more than 60 of public pension plan revenue5 However adjusting return assumptions is not the only tool at policymakersrsquo disposal for mitigating economic risk Another strategy is to adopt a formal cost-sharing policy that distributes unexpected cost increasesmdashcosts that result from short- or long-term deviations from plan expectationsmdashbetween employers and plan members

Ensuring cost predictability through cost-sharingThe five years of data also demonstrate the role that cost-sharing plan provisions can play in supporting cost predictability In particular Tennessee Wisconsin and South Dakota report steady and consistent budget costs over the five-year time horizon while remaining at or near full funded status In fact these three states are the only ones in which funded status remained above 90 while pension contribution rates varied by less than 1 of payroll over the five years ending in 2018

This high level of cost predictability reflects the impact of the different cost-sharing features each state employs as part of plan benefit design in addition to consistently making full actuarial contributions each year South Dakota and Wisconsin have a long track record of using variable employee contributions or retiree cost of living adjustments (COLAs) to share the costs of investment shortfallsmdashor the benefits of strong financial marketsmdashwith employees and retirees Tennessee adopted a hybrid plan with cost-sharing policies after weathering the Great Recession

6

In comparison well-funded plans without cost-sharing features struggled to achieve both consistent costs and maintenance of funding levels over the five-year period ending in 2018 For example New York maintained a funded ratio in the high 90s between 2014 and 2018 but experienced fluctuations in employer costs as a percent of payroll of nearly 6 percentage points Data going back to 2008 show even more volatility in costs in which employer contribution rates in the state ranged from 8 to almost 22 of payroll North Carolina a well-funded state without cost-sharing had costs increase significantly over longer time periods about 6 percentage points during the 10-year period and the systemrsquos funded ratio fell by 10 percentage pointsmdashfrom 99 in 2014 to 89 in 2018

The graphic below illustrates how both New York and North Carolina two good examples of well-funded plans without cost-sharing features have experienced greater long-term volatility in costs compared with the three cost-sharing states Wisconsin Tennessee and South Dakota These states were chosen because all five are among the eight best-funded states so the differences we see here are primarily due to differences in cost-sharing features as opposed to differences in payments to address unfunded liabilities

Figure 3

Change in Employer Contribution Rates Since the Great RecessionStates with cost-sharing policies managed to minimize volatility in employer contributions

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Change between 2008 and 2018 Change between 2014 and 2018

0

2

4

6

8

WisconsinTennesseeSouth DakotaNorth CarolinaNew York

-8

-6

-4

-2

7

Pew also looks at expected employer cost going forward to determine if cost-sharing measures can further protect state budgets For example Figure 4 illustrates the employer cost variability metricmdashhow the employer cost as a percent of payroll is projected to change under a low return scenariomdashfor the five states6 Well-funded plans with cost-sharing features tend to fare better South Dakota Wisconsin and Tennessee would see zero or small changes in employer costs while North Carolina and New York experience much larger increases under the same low return scenario

Figure 4

Projected Employer Cost of New Hire Benefits as a Percentage of PayStates vary in how much cost uncertainty they face from the plan design offered to new employees

Notes Under the low return scenario the analysis assumes a 5 return The projected cost of new benefits includes contributions to the defined contribution component of the hybrid in the case of Tennesseersquos hybrid plan The analysis for each state is based on specific retirement systems including New York Employeesrsquo Retirement System Teachersrsquo and State Employeesrsquo Retirement System of North Carolina South Dakota Retirement System Tennessee Hybrid Pension Plan and the Wisconsin Retirement System

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Although cost-sharing features are not required for full funding many states have adopted variable employee contributions or variable COLAs in an effort to reduce the volatility of employer costs and limit ad hoc benefit changes Following the Great Recession many states elected to retroactively share retirement plan risk with members including in some cases reducing COLAs for retirees or increasing contributions for current workers Making cost-sharing part of the benefit design can reduce instances in which workers realize they were bearing risk after an economic downturn or other negative event had already transpired7

0 2 4 6 8 10 12 14 16 18

South Dakota SDRS

Tennessee HybridPension

Wisconsin WRS

North Carolina TSERS

New York ERS

55

57

16

0

0

Expected Low returns

8

Stress testing is emerging as an effective risk management toolMany states may not be prepared for how an economic downturn could affect the costs of their retirement systems The 2014 changes to GASB reporting requirements included a requirement that plans report sensitivity analysis related to investment returns But the requirement is limited to reporting liabilities within a narrow range of alternative investment returns of +- 1 at a single point in time Furthermore it does not require forward-looking projections that account for wider swings in investment returns or the risk of contributions falling short of the levels required by a statersquos own policies8

The experience of the past 20 years shows that states need to consider both of these risk factors more fully To better understand the risks facing state pension plans and ultimately state budgets policymakers are turning to stress testingmdashand the adoption of new actuarial standards that promote its usemdashto assess and manage investment and contribution risk

Stress testing involves the simulation of a range of economic scenarios and investment returns to determine their potential impact on future pension costs and liabilities Building on existing actuarial projections comprehensive stress testing can be a powerful tool for policymakers to understand how pension balance sheets and government budgets will fare during an economic downturn or over a period of lower-than-expected growth It also allows states to evaluate the impact of reform proposals or policy changes

Fourteen states have enacted or are considering adopting stress testing requirements And the results of stress test analyses in Colorado Connecticut and Hawaii demonstrate that this is not an academic exercise

In Colorado a 2015 stress test analysis concluded that the state faced a 1 in 4 chance that the assets in the Public Employeesrsquo Retirement Associationrsquos main fund would be depleted within 25 to 30 years The finding led to reforms that were foundmdashthrough further stress testingmdashto mitigate the risk of insolvency In Connecticut a stress test analysis in 2018 found that although reforms to the State Employees Retirement System had improved the systemrsquos fiscal health additional changes to the teachersrsquo system were needed to avoid substantial cost increases As a result policymakers made reforms to address these risks as well And in Hawaiimdashwhich has issued annual stress test reports since 2017mdashpolicymakers have used the analysis to demonstrate that recent reforms to the statersquos contribution policy have improved the planrsquos fiscal position

We expect the trend of adopting public risk reporting and stress testing to continue as state retirement systems implement the Actuarial Standard of Practice No 51 adopted by the Actuarial Standards Board in September 2017 The new standards require plan actuaries to regularly conduct an assessment of investment contribution and other risks

9

Figure 5

States That Have Enacted or Are Considering Adopting Stress Testing RequirementsTen states require stress testing or risk reporting eight have adopted it since 2017

Note Of the states that have adopted stress testing requirements by statute at least four (Washington California Virginia and Hawaii) have produced at least two stress testing reports as of January 2020 Map is as of April 2020

Source State public documents or as provided by state officials

copy 2020 The Pew Charitable Trusts

These actuarial studies can provide a comprehensive assessment of a range of risk factors including investment contribution and longevity risk But the reports are designed primarily for plan fiduciaries as opposed to a broader set of stakeholders Pewrsquos ldquoFoundation for Public Pensions Risk Reportingrdquo released in November 2018 in collaboration with the Harvard Kennedy Schoolrsquos Mossavar-Rahmani Center for Business and Government was designed to leverage these data in a standard form that is focused on impacts to taxpayers and government budget officials9 And with the impact of COVID-19 on financial markets and pension balance sheets states are already applying Pew and the centerrsquos principles of risk reporting

For example in Montana a stress test report focusing on an asset shock scenario with a significant loss on plan investments similar to the recent downturn beginning in March 2020 was used to assess the sufficiency of the statersquos funding policy entering a recession The results suggest that policymakers will face difficult decisions in terms of strengthening pension funding while revenue is projected to decline Although these decisions are challenging the stress test has provided policymakers with a clear understanding of the goals for pension reform

Risk reporting for public pensions should be accessible to all stakeholders and designed to inform planning and decision-making and to assist government officials and others as they assess the potential impact of the next recession It can be used to quantify the potential cost of investment risk on government budgets evaluate the

WY

AZ

CA

ID

UT

MT

NVOR

WA

NM

OK

TX

AR

CO

IA

KS

LA

MN

MONE

ND

SD

AK HI

WI

AL

IL IN

KY

MS

TN

NY

NC

OH

PA

WV

FL

GA

ME

MI

SC

VA

MA

CT

VT NH

RI

NJ

DEMD

Stress testing requirements Considering

10

impact of contribution risk on pension system financial position and provide a framework to evaluate policy proposals to strengthen state fiscal health

ConclusionAlthough many state and local pension plans are still vulnerable to market volatility and recession others have weathered past economic downturns well In the near-term state and local officials will continue to focus on the COVID-19 pandemic while navigating a host of budget challenges including declining revenue and an increased need for safety net programs As decision-makers confront these challenges a careful evaluation of successful systemsrsquo policies reveals common practices that can serve as a toolkit for policymakers to strengthen their statesrsquo pension plans over the long-term All states should consider

bull Funding at levels that target debt reduction Plans that consistently make annual payments sufficient to pay for current benefits as well as reduce a portion of pension debt are more likely to recover quickly from economic downturns and better weather recessions

bull Decreasing assumed returns and discount rates Forecasts of lower-than-historical economic growth and bond yields over the next 10 to 20 years drive the growing consensus that pension funds should plan for lower long-term investment returns than those of the past

bull Ensuring cost predictability Plans with cost-sharing features were the ones most likely to recover quickly from the downturns of the first decade of the 2000s and to maintain a strong financial position throughout the recovery

bull Employing stress testing and public risk reporting States that regularly assess whether current pension policies are sustainable throughout the economic cycle and over time have the information necessary to ensure that pension plans will be resilient during downturns

There is no one-size-fits-all solution when it comes to plan structure and design However the practices of well-funded plans of all types indicate that these four policy prescriptions can help achieve and maintain fiscal sustainability for pension balance sheets and sponsoring government balance sheets as well as ensure that benefits will be paid to the workers and retirees who depend on them

Appendix A MethodologyAll figures presented are as reported in public documents or as provided by plan officials The main data sources used were the comprehensive annual financial reports produced by each state and pension plan actuarial reports and valuations and other state documents that disclose financial details about public employment retirement systems Pew collected data for more than 230 pension plans

Pew shared the collected data with plan officials to give them an opportunity to review them and to provide additional information This feedback was incorporated into the data presented in this brief

Because of lags in valuation for many state pension plans only partial 2019 data were available and fiscal 2018 is the most recent year for which comprehensive data were available for all 50 states Data on Tennessee aggregate political subdivisions were not available for fiscal 2018 so data were rolled forward from 2017 Data on a subset of California local governments participating in the California Public Employeesrsquo Retirement System were not available in aggregate and were not included in our data

Each state retirement system uses different key assumptions and methods in presenting its financial information Pew made no adjustments or changes to the presentation of aggregate state asset or liability data for this brief

11

Assumptions underlying each statersquos funding data include the assumed rate of return on investments and estimates of employeesrsquo life spans retirement ages salary growth marriage rates retention rates and other demographic characteristics

Appendix B State data 2018In thousands

State Assets (plan net position) Liabilities (total pension liability)

Pension debt (net pension liability) Funded ratio

Alabama $38973099 $54201941 $15228842 719

Alaska $14995615 $21925093 $6929477 684

Arizona $47908905 $73124711 $25215806 655

Arkansas $28149299 $34657689 $6508389 812

California $455619154 $640471294 $184852140 711

Colorado $44906648 $76413747 $31507099 588

Connecticut $30697189 $65768148 $35070959 467

Delaware $10064363 $11825432 $1761069 851

Florida $161429344 $202133975 $40704630 799

Georgia $92155238 $115086038 $22930800 801

Hawaii $16598408 $29917401 $13318993 555

Idaho $16757951 $18138483 $1380532 924

Illinois $89823202 $230416362 $140593161 390

Indiana $28971090 $43542361 $14571271 665

Iowa $33054838 $39536464 $6481626 836

Kansas $19696209 $28596716 $8900507 689

Kentucky $23282022 $51885561 $28603539 449

Louisiana $36140052 $53731083 $17591031 673

Maine $14532362 $17197897 $2665535 845

Maryland $52125680 $74080615 $21954935 704

Massachusetts $56786732 $93728000 $36941268 606

Michigan $64647414 $102250365 $37602952 632

Minnesota $68422729 $83611446 $15188717 818

Continued on next page

12

Mississippi $28135395 $44944890 $16809495 626

Missouri $58211187 $74846702 $16635515 778

Montana $11584819 $15966542 $4381723 726

Nebraska $14256785 $15783762 $1526977 903

Nevada $41560782 $55212291 $13651509 753

New Hampshire $8894798 $13747481 $4852683 647

New Jersey $81526803 $212243893 $130717090 384

New Mexico $28373494 $46539973 $18166479 610

New York $212076811 $216315013 $4238202 980

North Carolina $97635765 $110145689 $12509924 886

North Dakota $5675354 $8705612 $3030258 652

Ohio $157058983 $207077595 $50018612 758

Oklahoma $32237217 $39635039 $7397822 813

Oregon $69327500 $84476100 $15148600 821

Pennsylvania $83300714 $152136679 $68835965 548

Rhode Island $6485178 $11966274 $5481096 542

South Carolina $31207104 $56672828 $25465724 551

South Dakota $12235719 $12233387 -$2332 1000

Tennessee $48996019 $50135354 $1139335 977

Texas $183858309 $260330851 $76472542 706

Utah $31259522 $36708181 $5448659 852

Vermont $4341722 $6760162 $2418440 642

Virginia $76555264 $96893151 $20337887 790

Washington $92610488 $98658961 $6048473 939

West Virginia $15566369 $18923489 $3357120 823

Wisconsin $96737081 $100294768 $3557687 965

Wyoming $7914035 $11556643 $3642608 685

Total $2983360762 $4221152134 $1237791374 707

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

13

State

Beginning of year net

pension liability

Assumed rate of return

(weighted average

across plans)

Assumed interest due on 2018 beginning

of year debt

2018 normal costdagger

2018 total expected

costDagger

2018 employee

contributions with interest

2018 employer

contribution benchmarksect

2018 actual employer

contributions with interest

Percent of employer

benchmark paid

Net amortization||

Alabama $15251096 775 $1181960 $954407 $2136367 $767179 $1369188 $1293504 94 -$75684

Alaska $7243003 800 $579497 $242840 $822336 $128306 $694030 $556411 80 -$137619

Arizona $27416368 774 $2122280 $1825501 $3947780 $1347511 $2600269 $2162496 83 -$437773

Arkansas $7853261 710 $557951 $534527 $1092478 $219977 $872501 $776295 89 -$96206

California $191130787 707 $13503891 $14100694 $27604585 $6762629 $20841956 $24116619 116 $3274664

Colorado $54596452 485 $2648807 $2185834 $4834641 $819995 $4014647 $1903073 47 -$2111573

Connecticut $34811035 733 $2550487 $905880 $3456367 $526637 $2929730 $2840519 97 -$89212

Delaware $1961753 631 $123883 $236947 $360830 $79153 $281677 $280407 100 -$1271

Florida $40281942 617 $2483643 $2682437 $5166080 $772653 $4393427 $3501282 80 -$892145

Georgia $22889927 749 $1714408 $1674041 $3388449 $826840 $2561609 $2857440 112 $295831

Hawaii $12950306 700 $906521 $584470 $1490992 $268354 $1222637 $876760 72 -$345878

Idaho $1506653 710 $106972 $440220 $547193 $253207 $293986 $394422 134 $100436

Illinois $136881554 696 $9523705 $3351603 $12875308 $1541872 $11333437 $8143193 72 -$3190244

Indiana $17326203 675 $1169519 $602253 $1771772 $62405 $1709366 $1989838 116 $280471

Iowa $6840464 701 $479728 $881056 $1360783 $505976 $854807 $777309 91 -$77498

Kansas $9128629 775 $707469 $552423 $1259892 $436267 $823625 $921493 112 $97868

Appendix C Net amortization details 2018In thousands

Continued on next page

14

Kentucky $42916062 457 $1962340 $1344834 $3307174 $459624 $2847550 $1885289 66 -$962261

Louisiana $18214179 767 $1396832 $754930 $2151762 $599520 $1552242 $2117818 136 $565576

Maine $2995575 688 $205946 $293786 $499732 $196064 $303668 $411397 135 $107728

Maryland $22584000 736 $1663262 $1358213 $3021475 $824117 $2197359 $2110351 96 -$87008

Massachusetts $35710159 750 $2678262 $1757434 $4435696 $1406338 $3029358 $2674071 88 -$355287

Michigan $32483291 749 $2432624 $850399 $3283024 $448739 $2834285 $3675705 130 $841420

Minnesota $37198871 570 $2118482 $2394914 $4513396 $1140576 $3372821 $1399477 41 -$1973343

Mississippi $16783124 775 $1300692 $710195 $2010887 $595085 $1415802 $1073116 76 -$342685

Missouri $15774044 758 $1196427 $1233899 $2430326 $931469 $1498857 $1582607 106 $83750

Montana $4080482 769 $313807 $257534 $571341 $211668 $359673 $362690 101 $3017

Nebraska $1474474 804 $118563 $361308 $479872 $249491 $230380 $320606 139 $90225

Nevada $13319492 750 $998962 $1138361 $2137323 $1024105 $1113217 $970167 87 -$143051

New Hampshire $4965063 725 $359849 $273264 $633113 $226092 $407022 $444277 109 $37255

New Jersey $142288433 741 $10539842 $4970779 $15510621 $2168820 $13341800 $4691558 35 -$8650242

New Mexico $16485691 641 $1056961 $879231 $1936192 $591229 $1344963 $738207 55 -$606756

New York $11468876 700 $802821 $3678776 $4481597 $361411 $4120187 $4989268 121 $869081

North Carolina $9631900 721 $694086 $2370680 $3064766 $1383612 $1681154 $2207884 131 $526731

North Dakota $2987137 706 $210885 $244878 $455763 $164401 $291362 $198577 68 -$92785

Ohio $39735633 735 $2920649 $3071713 $5992362 $3055314 $2937048 $3748626 128 $811578

Oklahoma $8548375 747 $638452 $763718 $1402170 $456570 $945600 $1326526 140 $380926

Oregon $13480000 720 $970560 $1108200 $2078760 $13046 $2065714 $1439274 70 -$626440

Continued on next page

15

Note Numbers may not be exact due to rounding

The assumed rate of return is weighted for the plans in each state by the net pension liability at the beginning of 2018

dagger The normal cost refers to the cost of benefits earned by employees in any given year Also called the service cost

Dagger The total expected cost represents the projected increase in the funding gap before taking employer and employee contributions into account It is equal to the normal cost plus the assumed interest on the unfunded liability

sect The employer contribution benchmark is the contribution level employers need to meet in order to keep pension debt from growing

|| For net amortization positive numbers mean expected progress in paying down pension debt Negative numbers mean expected growth in pension debt

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Pennsylvania $66328481 725 $4808815 $2855906 $7664721 $1470963 $6193758 $6522941 105 $329183

Rhode Island $5454061 700 $381784 $152862 $534646 $96362 $438285 $433127 99 -$5157

South Carolina $25482182 725 $1847458 $1103205 $2950663 $1046631 $1904033 $1710476 90 -$193557

South Dakota -$9075 650 -$590 $222710 $222120 $128237 $93882 $128724 137 $34842

Tennessee $1695312 731 $123939 $853550 $977488 $348831 $628657 $1141243 182 $512586

Texas $55145722 687 $3787172 $6196686 $9983858 $4210268 $5773590 $4280858 74 -$1492733

Utah $3420315 695 $237712 $642590 $880302 $37553 $842749 $1177968 140 $335219

Vermont $2283896 793 $181025 $118295 $299320 $101237 $198082 $199899 101 $1816

Virginia $21480408 700 $1503629 $1888831 $3392460 $891439 $2501020 $2554085 102 $53065

Washington $9883432 737 $728406 $1931582 $2659988 $1100150 $1559838 $2827714 181 $1267876

West Virginia $3917091 750 $293782 $281951 $575733 $164283 $411449 $678234 165 $266785

Wisconsin -$2969118 700 -$207838 $1860937 $1653099 $1006427 $646671 $1065965 165 $419294

Wyoming $2700673 671 $181154 $236862 $418016 $178956 $239060 $178228 75 -$60832

16

Appendix D Details of changes to net pension liability 2018In thousands

StateBeginning of year net

pension liability

End of year net pension

liabilityTotal changes

Net amortization benchmark

Employer + other

contributions

Net amortization

Change to reconcile

Investment experience

Benefit changes

Actuarial experience

Actuarial changes

Alabama $15251096 $15228842 -$22254 $1369188 $1293504 -$75684 -$97938 -$544500 $0 $177032 $269530

Alaska $7243003 $6929477 -$313526 $694030 $556411 -$137619 -$451145 -$17225 $0 -$433920 $0

Arizona $27416368 $25215806 -$2200562 $2600269 $2162496 -$437773 -$2638335 -$826137 -$116011 $515560 -$2211747

Arkansas $7853261 $6508389 -$1344872 $872501 $776295 -$96206 -$1441078 -$959873 $0 $34562 -$515767

California $191130787 $184852140 -$6278647 $20841956 $24116619 $3274664 -$3003983 -$3031295 $668 $2158587 -$2131943

Colorado $54596452 $31507099 -$23089353 $4014647 $1903073 -$2111573 -$25200926 $4206458 -$5980577 $889134 -$24315941

Connecticut $34811035 $35070959 $259924 $2929730 $2840519 -$89212 $170712 $74367 $510940 -$414595 $0

Delaware $1961753 $1761069 -$200684 $281677 $280407 -$1271 -$201955 -$285729 $11154 $89307 -$16687

Florida $40281942 $40704631 $422689 $4393427 $3501282 -$892145 -$469456 -$3049099 $0 $742984 $1836659

Georgia $22889927 $22930800 $40873 $2561609 $2857440 $295831 $336704 -$1164304 $72381 $1084627 $344000

Hawaii $12950306 $13318993 $368687 $1222637 $876760 -$345878 $22810 -$101944 $0 $124753 $0

Idaho $1506653 $1380532 -$126121 $293986 $394422 $100436 -$25684 -$167683 $83585 -$47697 $106111

Illinois $136881554 $140593161 $3711607 $11333437 $8143193 -$3190244 $521363 -$797304 -$374603 $731439 $961832

Indiana $17326203 $14571271 -$2754932 $1709366 $1989838 $280471 -$2474461 -$619782 $0 -$169086 -$1685593

Iowa $6840464 $6481626 -$358838 $854807 $777309 -$77498 -$436336 -$363061 -$1208 -$140228 $68161

Kansas $9128629 $8900507 -$228122 $823625 $921493 $97868 -$130254 -$83111 $0 -$47143 $0

Kentucky $42916062 $28603539 -$14312523 $2847550 $1885289 -$962261 -$15274784 -$1098415 $10513 -$19567 -$14167315

Louisiana $18214179 $17591031 -$623148 $1552242 $2117818 $565576 -$57572 -$696779 $658 -$195920 $834469

Continued on next page

17

Maine $2995575 $2665535 -$330041 $303668 $411397 $107728 -$222312 -$391240 -$106123 $35815 $239236

Maryland $22584000 $21954935 -$629065 $2197359 $2110351 -$87008 -$716073 -$185256 $5505 -$653748 $117426

Massachusetts $35710159 $36941268 $1231109 $3029358 $2674071 -$355287 $875822 -$785503 $0 $194325 $1467000

Michigan $32483291 $37602953 $5119662 $2834285 $3675705 $841420 $5961081 -$2089131 $0 -$64336 $8114548

Minnesota $37198871 $15188717 -$22010154 $3372821 $1399477 -$1973343 -$23983497 -$2573005 -$5765677 $1583 -$15646398

Mississippi $16783124 $16809495 $26371 $1415802 $1073116 -$342685 -$316314 -$354928 $0 $38614 $0

Missouri $15774044 $16635515 $861471 $1498857 $1582607 $83750 $945221 -$404892 -$8 -$7407 $1357528

Montana $4080482 $4381723 $301241 $359673 $362690 $3017 $304258 -$109601 $0 $207538 $206321

Nebraska $1474474 $1526977 $52503 $230380 $320606 $90225 $142728 $119428 $88636 -$65335 $0

Nevada $13319492 $13651509 $332017 $1113217 $970167 -$143051 $188966 -$315116 $0 $504082 $0

New Hampshire

$4965063 $4852683 -$112380 $407022 $444277 $37255 -$75125 -$108669 $0 $29109 $4435

New Jersey $142288433 $130717090 -$11571343 $13341800 $4691558 -$8650242 -$20221585 -$6169156 $0 $850491 -$14902920

New Mexico $16485691 $18166479 $1680788 $1344963 $738207 -$606756 $1074032 -$58134 $0 -$74477 $1206643

New York $11468876 $4238202 -$7230674 $4120187 $4989268 $869081 -$6361593 -$7838038 $0 $1476445 $0

North Carolina $9631900 $12509924 $2878024 $1681154 $2207884 $526731 $3404755 -$100834 $44793 $1199449 $2261347

North Dakota $2987137 $3030258 $43121 $291362 $198577 -$92785 -$49665 -$86485 $0 -$94216 $131036

Ohio $39735633 $50018612 $10282979 $2937048 $3748626 $811578 $11094557 $7711615 $0 -$307530 $3690472

Oklahoma $8548375 $7397822 -$1150553 $945600 $1326526 $380926 -$769626 -$575769 -$113763 -$105401 $25307

Oregon $13480000 $15148600 $1668600 $2065714 $1439274 -$626440 $1042160 -$1272440 $0 $74300 $2240300

Pennsylvania $66328481 $68835965 $2507484 $6193758 $6522941 $329183 $2836667 $3414973 $0 -$578306 $0

Rhode Island $5454061 $5481096 $27035 $438285 $433127 -$5157 $21877 -$50633 $0 $72627 -$116

South Carolina $25482182 $25465724 -$16458 $1904033 $1710476 -$193557 -$210015 -$136380 $0 -$73635 $0

Continued on next page

18

Sources Comprehensive annual financial reports actuarial reports and valuations or other public documents or as provided by plan

copy 2020 The Pew Charitable Trusts

Appendix E Debt driversStatesrsquo improved fiscal position in 2018 was driven by strong investment returnsmdash86 for those reporting on a fiscal year ending June 30mdashthat exceeded plan assumptions On their own investment returns lowered the cumulative funding gap by more than $10 billion although this reduction was offset by insufficient contributions Average performance through the following fiscal year ending June 30 2019 was under 710 Economic conditions in the third quarter of fiscal year 2020 point to a shortfall in meeting investment targets and an increase in unfunded liabilities of up to $500 billion nine months through the fiscal year

States cannot rely on investment income alone to chip away at their accumulated pension debt Pew has collected annual financial data on state-run pension systems since before the recession But even after a decade of economic recovery states have made limited progress in paying down pension debt In fact since 2007 the shortfall between actual contributions to state pension plans and minimum actuarial funding standards was $200 billion11

Changes to plan assumptions also decreased reported liabilities by $30 billion in 2018 however that result is driven by Colorado Kentucky Minnesota and New Jersey where improvements in funded status allowed plans to substantially increase their discount rates The remaining 46 states reported an increase in liabilities of $39 billion from assumption changes

South Dakota -$9075 -$2332 $6743 $93882 $128724 $34842 $41585 -$145567 $0 $5221 $181932

Tennessee $1695312 $1139335 -$555977 $628657 $1141243 $512586 -$43391 -$606253 $17316 -$32315 $577861

Texas $55145722 $76472542 $21326821 $5773590 $4280858 -$1492733 $19834088 -$274164 $2825 $68677 $20036750

Utah $3420315 $5448659 $2028344 $842749 $1177968 $335219 $2363563 $2338849 $0 $24714 $0

Vermont $2283896 $2418440 $134544 $198082 $199899 $1816 $136361 $12217 $194 $156907 -$32957

Virginia $21480408 $20337887 -$1142521 $2501020 $2554085 $53065 -$1089456 -$240348 $10811 -$859919 $0

Washington $9883432 $6048473 -$3834959 $1559838 $2827714 $1267876 -$2567083 -$1546224 $175100 -$118086 -$1077873

West Virginia $3917091 $3357120 -$559971 $411449 $678234 $266785 -$293186 -$279644 $0 -$14504 $962

Wisconsin -$2969118 $3557687 $6526805 $646671 $1065965 $419294 $6946099 $11552920 $0 -$4968302 $361481

Wyoming $2700673 $3642608 $941935 $239060 $178228 -$60832 $881102 $882867 $0 -$67752 $65987

Total $1276007674 $1237791374 -$38216300 $126118030 $114658013 -$11460017 -$49676317 -$10189958 -$11422892 $1934455 -$29997922

19

Change in Pension DebtStrong investment performance and changes in assumptions reduced reported pension debt by $10 billion and $30 billion respectively

Source Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Appendix F Net amortization benchmarkThe benchmark is calculated by taking the sum of service cost (the actuarial value of the benefits earned in 2018 also called normal cost) and interest on the net pension liability at the beginning of the year (each pension planrsquos total pension liability and the net pension liability both grow annually at the planrsquos assumed rate of return) and subtracting employee contributions Employer and employee contributions are adjusted to reflect expected interest After subtracting the $43 billion contributed by workers nationwide in 2018 (including interest) employers would have needed to contribute $126 billion to meet the net amortization benchmark to keep pension debt from growing To actually make progress on closing the funding gap states would have to exceed the contribution benchmark on a consistent basis

In b

illio

ns

$0

$200

$400

$600

$800

$1000

$1200

$1400

2018 netpension liability

Other factorsNetamortization

Changes inassumptions

Investmentgains

2017 netpension liability

$1276 -$10 -$30 -$9$11 $1238

For further information please visit pewtrustsorgpensions

Contact Sarah Jones communications officer Email sjonespewtrustsorg Project website pewtrustsorgpensions

The Pew Charitable Trusts is driven by the power of knowledge to solve todayrsquos most challenging problems Pew applies a rigorous analytical approach to improve public policy inform the public and invigorate civic life

Endnotes1 See Appendix F for more information on the net amortization benchmark

2 For example the US experienced annual gross domestic product (GDP) growth of more than 55 from 1988 through 2007 while the Congressional Budget Office now projects only 4 annual growth for the next decade See Congressional Budget Office ldquoThe Budget and Economic Outlook 2019 to 2029rdquo (2019) httpswwwcbogovsstemfiles2019-0354918-Outlook-3pdf

3 See SEBAC 2017 Agreement httpaftctorgsitesaftctorgfilessebac_2017_ta_signedpdf for details on Connecticut State Employees Retirement System (SERS) pension reforms

4 See Fitch Ratings ldquoConnecticut Teacher Pension Changes Costly but Lower Fiscal Risksrdquo Feb 28 2019 httpswwwfitchratingscomsitepr10064878

5 National Association of State Retirement Administrators ldquoNASRA Issue Brief Public Pension Plan Investment Return Assumptionsrdquo (updated April 2014) httpwwwnasraorgfilesIssue20BriefsNASRAInvReturnAssumptBriefpdf

6 Low return scenario assumes a 5 return

7 K Brainard and A Brown ldquoIn-Depth Risk Sharing in Public Retirement Plansrdquo (National Association of State Retirement Administrators 2018)

8 GASB Statement 67 on Financial Reporting for Pension Plans does also require an adjustment to the discount rate assumptionsmdashresulting in a higher reported pension liabilitymdashif current contribution policies are deemed insufficient However as of 2018 reporting only nine of the largest 100 plans across the 50 states are required to make this adjustment down from 15 in 2017

9 The Pew Charitable Trusts ldquoFoundation for Public Pensions Risk Reportingrdquo (2018) httpswwwhksharvardedusitesdefaultfilescentersmrcbgprogramsFoundation20for20Pensions20Risk20Reporting20(Strawman)pdf

10 Wilshire Trust Universe Comparison Service and Wilshire TUCS are service marks of Wilshire Associates Inc (ldquoWilshirerdquo) and have been licensed for use by The Pew Charitable Trusts All content of Wilshire TUCS is copyright 2019 Wilshire Associates Inc all rights reserved

11 Accounting standards changed in 2014 From 2007 to 2013 the shortfall is calculated between the actuarial recommended contribution and actual employer contributions From 2014 to 2018 the shortfall represents the gap between the net amortization benchmark and employer contributions

4

Figure 2

State Pension Funding in 2018Just seven states were 90 funded while nine states were less than 60 funded

Note Numbers reflect the Governmental Accounting Standards Board reporting standards as of 2018

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Analysis of the 2018 net amortization metric shows meaningful improvement with the number of states achieving positive amortization increasing from 16 to 25 This means that if plans achieve their investment return targetsmdashcurrently averaging 72mdashhalf of states will continue to reduce pension debt and improve funding levels And although funds are likely to post investment shortfalls for the current fiscal year states that have been reducing pension debt are better positioned to weather economic uncertainty For the 25 states whose pension debt continues to rise the slowdown in the economymdashcombining lower investment returns or losses with lower state revenuesmdashwill make catching up that much more difficult

And when examined through the lens of five-year data the importance of meeting funding requirements is clear The 20 states that have exhibited positive amortization from 2014 to 2018 (that is contributed enough to pay down at least one dollar of pension debt) have lowered their unfunded liability collectively by $11 billion Conversely the remaining 30 states have reported an increase in unfunded liabilities of $281 billion

Because growing pension debt leads to higher costs states with poorly funded plans have had to increase their pension contributions And the higher cost of paying for benefits may affect the statesrsquo ability to fund other core government services and crowd out other important public investments

WY

AZ

CA

ID

UT

MT

NVOR

WA

NM

OK

TX

AR

CO

IA

KS

LA

MN

MONE

ND

SD

AK HI

WI

AL

IL IN

KY

MS

TN

NY

NC

OH

PA

WV

FL

GA

ME

MI

SC

VA

MA

CT

VT NH

RI

NJ

DEMD

Below 60 60-69 70-79 80-89 90-100

5

In contrast states such as Maine and West Virginia that were severely underfunded historically but subsequently adopted strong funding policies kept costs stable and pension debt shrinking through the Great Recession

Lowering return targets and discount rates reduces riskOver the past five years the average assumed rate of return for state pension fund investments has declined from 76 in 2014 to 72 in 2018 This adjustment is based on the expectation that lower economic growth will result in lower future investment performance2 In the 20 years prior to the Great Recession for example many plans averaged returns of 8 however most experts now forecast long-term returns of around 65 for the typical public plan portfolio Recognizing this new economic landscape 42 states have reduced their discount ratesmdashthe figure used to express future liabilities in todayrsquos dollarsmdashsince 2014 including 23 that did so in 2018

Lowering assumed rates of return can help plans reduce the risk of missing return targets and incurring unexpected costs during market downturns However because the present value of future liabilities is typically calculated using the assumed rate of return as the discount rate lowering the discount rate also has the immediate effect of raising calculated liabilities and contributions required from state budgets But there is evidence that plans can adopt more reasonable return assumptions without harming credit ratings or breaking the bank

For example Connecticut reduced the assumed rates of return (and discount rates) for its State Employees Retirement System and Teachersrsquo Retirement System from 8 to 69 in 2017 and 2019 respectively but the state concurrently adopted funding and amortization policies that would stabilize long-term contribution rates3 Collectively these polices help to mitigate the impact of market volatility on plan financials and the statersquos budget while also factoring positively in rating agency scoring4

Setting realistic return assumptions is critical to plan fiscal health given the importance of investment returnsmdashthey make up more than 60 of public pension plan revenue5 However adjusting return assumptions is not the only tool at policymakersrsquo disposal for mitigating economic risk Another strategy is to adopt a formal cost-sharing policy that distributes unexpected cost increasesmdashcosts that result from short- or long-term deviations from plan expectationsmdashbetween employers and plan members

Ensuring cost predictability through cost-sharingThe five years of data also demonstrate the role that cost-sharing plan provisions can play in supporting cost predictability In particular Tennessee Wisconsin and South Dakota report steady and consistent budget costs over the five-year time horizon while remaining at or near full funded status In fact these three states are the only ones in which funded status remained above 90 while pension contribution rates varied by less than 1 of payroll over the five years ending in 2018

This high level of cost predictability reflects the impact of the different cost-sharing features each state employs as part of plan benefit design in addition to consistently making full actuarial contributions each year South Dakota and Wisconsin have a long track record of using variable employee contributions or retiree cost of living adjustments (COLAs) to share the costs of investment shortfallsmdashor the benefits of strong financial marketsmdashwith employees and retirees Tennessee adopted a hybrid plan with cost-sharing policies after weathering the Great Recession

6

In comparison well-funded plans without cost-sharing features struggled to achieve both consistent costs and maintenance of funding levels over the five-year period ending in 2018 For example New York maintained a funded ratio in the high 90s between 2014 and 2018 but experienced fluctuations in employer costs as a percent of payroll of nearly 6 percentage points Data going back to 2008 show even more volatility in costs in which employer contribution rates in the state ranged from 8 to almost 22 of payroll North Carolina a well-funded state without cost-sharing had costs increase significantly over longer time periods about 6 percentage points during the 10-year period and the systemrsquos funded ratio fell by 10 percentage pointsmdashfrom 99 in 2014 to 89 in 2018

The graphic below illustrates how both New York and North Carolina two good examples of well-funded plans without cost-sharing features have experienced greater long-term volatility in costs compared with the three cost-sharing states Wisconsin Tennessee and South Dakota These states were chosen because all five are among the eight best-funded states so the differences we see here are primarily due to differences in cost-sharing features as opposed to differences in payments to address unfunded liabilities

Figure 3

Change in Employer Contribution Rates Since the Great RecessionStates with cost-sharing policies managed to minimize volatility in employer contributions

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Change between 2008 and 2018 Change between 2014 and 2018

0

2

4

6

8

WisconsinTennesseeSouth DakotaNorth CarolinaNew York

-8

-6

-4

-2

7

Pew also looks at expected employer cost going forward to determine if cost-sharing measures can further protect state budgets For example Figure 4 illustrates the employer cost variability metricmdashhow the employer cost as a percent of payroll is projected to change under a low return scenariomdashfor the five states6 Well-funded plans with cost-sharing features tend to fare better South Dakota Wisconsin and Tennessee would see zero or small changes in employer costs while North Carolina and New York experience much larger increases under the same low return scenario

Figure 4

Projected Employer Cost of New Hire Benefits as a Percentage of PayStates vary in how much cost uncertainty they face from the plan design offered to new employees

Notes Under the low return scenario the analysis assumes a 5 return The projected cost of new benefits includes contributions to the defined contribution component of the hybrid in the case of Tennesseersquos hybrid plan The analysis for each state is based on specific retirement systems including New York Employeesrsquo Retirement System Teachersrsquo and State Employeesrsquo Retirement System of North Carolina South Dakota Retirement System Tennessee Hybrid Pension Plan and the Wisconsin Retirement System

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Although cost-sharing features are not required for full funding many states have adopted variable employee contributions or variable COLAs in an effort to reduce the volatility of employer costs and limit ad hoc benefit changes Following the Great Recession many states elected to retroactively share retirement plan risk with members including in some cases reducing COLAs for retirees or increasing contributions for current workers Making cost-sharing part of the benefit design can reduce instances in which workers realize they were bearing risk after an economic downturn or other negative event had already transpired7

0 2 4 6 8 10 12 14 16 18

South Dakota SDRS

Tennessee HybridPension

Wisconsin WRS

North Carolina TSERS

New York ERS

55

57

16

0

0

Expected Low returns

8

Stress testing is emerging as an effective risk management toolMany states may not be prepared for how an economic downturn could affect the costs of their retirement systems The 2014 changes to GASB reporting requirements included a requirement that plans report sensitivity analysis related to investment returns But the requirement is limited to reporting liabilities within a narrow range of alternative investment returns of +- 1 at a single point in time Furthermore it does not require forward-looking projections that account for wider swings in investment returns or the risk of contributions falling short of the levels required by a statersquos own policies8

The experience of the past 20 years shows that states need to consider both of these risk factors more fully To better understand the risks facing state pension plans and ultimately state budgets policymakers are turning to stress testingmdashand the adoption of new actuarial standards that promote its usemdashto assess and manage investment and contribution risk

Stress testing involves the simulation of a range of economic scenarios and investment returns to determine their potential impact on future pension costs and liabilities Building on existing actuarial projections comprehensive stress testing can be a powerful tool for policymakers to understand how pension balance sheets and government budgets will fare during an economic downturn or over a period of lower-than-expected growth It also allows states to evaluate the impact of reform proposals or policy changes

Fourteen states have enacted or are considering adopting stress testing requirements And the results of stress test analyses in Colorado Connecticut and Hawaii demonstrate that this is not an academic exercise

In Colorado a 2015 stress test analysis concluded that the state faced a 1 in 4 chance that the assets in the Public Employeesrsquo Retirement Associationrsquos main fund would be depleted within 25 to 30 years The finding led to reforms that were foundmdashthrough further stress testingmdashto mitigate the risk of insolvency In Connecticut a stress test analysis in 2018 found that although reforms to the State Employees Retirement System had improved the systemrsquos fiscal health additional changes to the teachersrsquo system were needed to avoid substantial cost increases As a result policymakers made reforms to address these risks as well And in Hawaiimdashwhich has issued annual stress test reports since 2017mdashpolicymakers have used the analysis to demonstrate that recent reforms to the statersquos contribution policy have improved the planrsquos fiscal position

We expect the trend of adopting public risk reporting and stress testing to continue as state retirement systems implement the Actuarial Standard of Practice No 51 adopted by the Actuarial Standards Board in September 2017 The new standards require plan actuaries to regularly conduct an assessment of investment contribution and other risks

9

Figure 5

States That Have Enacted or Are Considering Adopting Stress Testing RequirementsTen states require stress testing or risk reporting eight have adopted it since 2017

Note Of the states that have adopted stress testing requirements by statute at least four (Washington California Virginia and Hawaii) have produced at least two stress testing reports as of January 2020 Map is as of April 2020

Source State public documents or as provided by state officials

copy 2020 The Pew Charitable Trusts

These actuarial studies can provide a comprehensive assessment of a range of risk factors including investment contribution and longevity risk But the reports are designed primarily for plan fiduciaries as opposed to a broader set of stakeholders Pewrsquos ldquoFoundation for Public Pensions Risk Reportingrdquo released in November 2018 in collaboration with the Harvard Kennedy Schoolrsquos Mossavar-Rahmani Center for Business and Government was designed to leverage these data in a standard form that is focused on impacts to taxpayers and government budget officials9 And with the impact of COVID-19 on financial markets and pension balance sheets states are already applying Pew and the centerrsquos principles of risk reporting

For example in Montana a stress test report focusing on an asset shock scenario with a significant loss on plan investments similar to the recent downturn beginning in March 2020 was used to assess the sufficiency of the statersquos funding policy entering a recession The results suggest that policymakers will face difficult decisions in terms of strengthening pension funding while revenue is projected to decline Although these decisions are challenging the stress test has provided policymakers with a clear understanding of the goals for pension reform

Risk reporting for public pensions should be accessible to all stakeholders and designed to inform planning and decision-making and to assist government officials and others as they assess the potential impact of the next recession It can be used to quantify the potential cost of investment risk on government budgets evaluate the

WY

AZ

CA

ID

UT

MT

NVOR

WA

NM

OK

TX

AR

CO

IA

KS

LA

MN

MONE

ND

SD

AK HI

WI

AL

IL IN

KY

MS

TN

NY

NC

OH

PA

WV

FL

GA

ME

MI

SC

VA

MA

CT

VT NH

RI

NJ

DEMD

Stress testing requirements Considering

10

impact of contribution risk on pension system financial position and provide a framework to evaluate policy proposals to strengthen state fiscal health

ConclusionAlthough many state and local pension plans are still vulnerable to market volatility and recession others have weathered past economic downturns well In the near-term state and local officials will continue to focus on the COVID-19 pandemic while navigating a host of budget challenges including declining revenue and an increased need for safety net programs As decision-makers confront these challenges a careful evaluation of successful systemsrsquo policies reveals common practices that can serve as a toolkit for policymakers to strengthen their statesrsquo pension plans over the long-term All states should consider

bull Funding at levels that target debt reduction Plans that consistently make annual payments sufficient to pay for current benefits as well as reduce a portion of pension debt are more likely to recover quickly from economic downturns and better weather recessions

bull Decreasing assumed returns and discount rates Forecasts of lower-than-historical economic growth and bond yields over the next 10 to 20 years drive the growing consensus that pension funds should plan for lower long-term investment returns than those of the past

bull Ensuring cost predictability Plans with cost-sharing features were the ones most likely to recover quickly from the downturns of the first decade of the 2000s and to maintain a strong financial position throughout the recovery

bull Employing stress testing and public risk reporting States that regularly assess whether current pension policies are sustainable throughout the economic cycle and over time have the information necessary to ensure that pension plans will be resilient during downturns

There is no one-size-fits-all solution when it comes to plan structure and design However the practices of well-funded plans of all types indicate that these four policy prescriptions can help achieve and maintain fiscal sustainability for pension balance sheets and sponsoring government balance sheets as well as ensure that benefits will be paid to the workers and retirees who depend on them

Appendix A MethodologyAll figures presented are as reported in public documents or as provided by plan officials The main data sources used were the comprehensive annual financial reports produced by each state and pension plan actuarial reports and valuations and other state documents that disclose financial details about public employment retirement systems Pew collected data for more than 230 pension plans

Pew shared the collected data with plan officials to give them an opportunity to review them and to provide additional information This feedback was incorporated into the data presented in this brief

Because of lags in valuation for many state pension plans only partial 2019 data were available and fiscal 2018 is the most recent year for which comprehensive data were available for all 50 states Data on Tennessee aggregate political subdivisions were not available for fiscal 2018 so data were rolled forward from 2017 Data on a subset of California local governments participating in the California Public Employeesrsquo Retirement System were not available in aggregate and were not included in our data

Each state retirement system uses different key assumptions and methods in presenting its financial information Pew made no adjustments or changes to the presentation of aggregate state asset or liability data for this brief

11

Assumptions underlying each statersquos funding data include the assumed rate of return on investments and estimates of employeesrsquo life spans retirement ages salary growth marriage rates retention rates and other demographic characteristics

Appendix B State data 2018In thousands

State Assets (plan net position) Liabilities (total pension liability)

Pension debt (net pension liability) Funded ratio

Alabama $38973099 $54201941 $15228842 719

Alaska $14995615 $21925093 $6929477 684

Arizona $47908905 $73124711 $25215806 655

Arkansas $28149299 $34657689 $6508389 812

California $455619154 $640471294 $184852140 711

Colorado $44906648 $76413747 $31507099 588

Connecticut $30697189 $65768148 $35070959 467

Delaware $10064363 $11825432 $1761069 851

Florida $161429344 $202133975 $40704630 799

Georgia $92155238 $115086038 $22930800 801

Hawaii $16598408 $29917401 $13318993 555

Idaho $16757951 $18138483 $1380532 924

Illinois $89823202 $230416362 $140593161 390

Indiana $28971090 $43542361 $14571271 665

Iowa $33054838 $39536464 $6481626 836

Kansas $19696209 $28596716 $8900507 689

Kentucky $23282022 $51885561 $28603539 449

Louisiana $36140052 $53731083 $17591031 673

Maine $14532362 $17197897 $2665535 845

Maryland $52125680 $74080615 $21954935 704

Massachusetts $56786732 $93728000 $36941268 606

Michigan $64647414 $102250365 $37602952 632

Minnesota $68422729 $83611446 $15188717 818

Continued on next page

12

Mississippi $28135395 $44944890 $16809495 626

Missouri $58211187 $74846702 $16635515 778

Montana $11584819 $15966542 $4381723 726

Nebraska $14256785 $15783762 $1526977 903

Nevada $41560782 $55212291 $13651509 753

New Hampshire $8894798 $13747481 $4852683 647

New Jersey $81526803 $212243893 $130717090 384

New Mexico $28373494 $46539973 $18166479 610

New York $212076811 $216315013 $4238202 980

North Carolina $97635765 $110145689 $12509924 886

North Dakota $5675354 $8705612 $3030258 652

Ohio $157058983 $207077595 $50018612 758

Oklahoma $32237217 $39635039 $7397822 813

Oregon $69327500 $84476100 $15148600 821

Pennsylvania $83300714 $152136679 $68835965 548

Rhode Island $6485178 $11966274 $5481096 542

South Carolina $31207104 $56672828 $25465724 551

South Dakota $12235719 $12233387 -$2332 1000

Tennessee $48996019 $50135354 $1139335 977

Texas $183858309 $260330851 $76472542 706

Utah $31259522 $36708181 $5448659 852

Vermont $4341722 $6760162 $2418440 642

Virginia $76555264 $96893151 $20337887 790

Washington $92610488 $98658961 $6048473 939

West Virginia $15566369 $18923489 $3357120 823

Wisconsin $96737081 $100294768 $3557687 965

Wyoming $7914035 $11556643 $3642608 685

Total $2983360762 $4221152134 $1237791374 707

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

13

State

Beginning of year net

pension liability

Assumed rate of return

(weighted average

across plans)

Assumed interest due on 2018 beginning

of year debt

2018 normal costdagger

2018 total expected

costDagger

2018 employee

contributions with interest

2018 employer

contribution benchmarksect

2018 actual employer

contributions with interest

Percent of employer

benchmark paid

Net amortization||

Alabama $15251096 775 $1181960 $954407 $2136367 $767179 $1369188 $1293504 94 -$75684

Alaska $7243003 800 $579497 $242840 $822336 $128306 $694030 $556411 80 -$137619

Arizona $27416368 774 $2122280 $1825501 $3947780 $1347511 $2600269 $2162496 83 -$437773

Arkansas $7853261 710 $557951 $534527 $1092478 $219977 $872501 $776295 89 -$96206

California $191130787 707 $13503891 $14100694 $27604585 $6762629 $20841956 $24116619 116 $3274664

Colorado $54596452 485 $2648807 $2185834 $4834641 $819995 $4014647 $1903073 47 -$2111573

Connecticut $34811035 733 $2550487 $905880 $3456367 $526637 $2929730 $2840519 97 -$89212

Delaware $1961753 631 $123883 $236947 $360830 $79153 $281677 $280407 100 -$1271

Florida $40281942 617 $2483643 $2682437 $5166080 $772653 $4393427 $3501282 80 -$892145

Georgia $22889927 749 $1714408 $1674041 $3388449 $826840 $2561609 $2857440 112 $295831

Hawaii $12950306 700 $906521 $584470 $1490992 $268354 $1222637 $876760 72 -$345878

Idaho $1506653 710 $106972 $440220 $547193 $253207 $293986 $394422 134 $100436

Illinois $136881554 696 $9523705 $3351603 $12875308 $1541872 $11333437 $8143193 72 -$3190244

Indiana $17326203 675 $1169519 $602253 $1771772 $62405 $1709366 $1989838 116 $280471

Iowa $6840464 701 $479728 $881056 $1360783 $505976 $854807 $777309 91 -$77498

Kansas $9128629 775 $707469 $552423 $1259892 $436267 $823625 $921493 112 $97868

Appendix C Net amortization details 2018In thousands

Continued on next page

14

Kentucky $42916062 457 $1962340 $1344834 $3307174 $459624 $2847550 $1885289 66 -$962261

Louisiana $18214179 767 $1396832 $754930 $2151762 $599520 $1552242 $2117818 136 $565576

Maine $2995575 688 $205946 $293786 $499732 $196064 $303668 $411397 135 $107728

Maryland $22584000 736 $1663262 $1358213 $3021475 $824117 $2197359 $2110351 96 -$87008

Massachusetts $35710159 750 $2678262 $1757434 $4435696 $1406338 $3029358 $2674071 88 -$355287

Michigan $32483291 749 $2432624 $850399 $3283024 $448739 $2834285 $3675705 130 $841420

Minnesota $37198871 570 $2118482 $2394914 $4513396 $1140576 $3372821 $1399477 41 -$1973343

Mississippi $16783124 775 $1300692 $710195 $2010887 $595085 $1415802 $1073116 76 -$342685

Missouri $15774044 758 $1196427 $1233899 $2430326 $931469 $1498857 $1582607 106 $83750

Montana $4080482 769 $313807 $257534 $571341 $211668 $359673 $362690 101 $3017

Nebraska $1474474 804 $118563 $361308 $479872 $249491 $230380 $320606 139 $90225

Nevada $13319492 750 $998962 $1138361 $2137323 $1024105 $1113217 $970167 87 -$143051

New Hampshire $4965063 725 $359849 $273264 $633113 $226092 $407022 $444277 109 $37255

New Jersey $142288433 741 $10539842 $4970779 $15510621 $2168820 $13341800 $4691558 35 -$8650242

New Mexico $16485691 641 $1056961 $879231 $1936192 $591229 $1344963 $738207 55 -$606756

New York $11468876 700 $802821 $3678776 $4481597 $361411 $4120187 $4989268 121 $869081

North Carolina $9631900 721 $694086 $2370680 $3064766 $1383612 $1681154 $2207884 131 $526731

North Dakota $2987137 706 $210885 $244878 $455763 $164401 $291362 $198577 68 -$92785

Ohio $39735633 735 $2920649 $3071713 $5992362 $3055314 $2937048 $3748626 128 $811578

Oklahoma $8548375 747 $638452 $763718 $1402170 $456570 $945600 $1326526 140 $380926

Oregon $13480000 720 $970560 $1108200 $2078760 $13046 $2065714 $1439274 70 -$626440

Continued on next page

15

Note Numbers may not be exact due to rounding

The assumed rate of return is weighted for the plans in each state by the net pension liability at the beginning of 2018

dagger The normal cost refers to the cost of benefits earned by employees in any given year Also called the service cost

Dagger The total expected cost represents the projected increase in the funding gap before taking employer and employee contributions into account It is equal to the normal cost plus the assumed interest on the unfunded liability

sect The employer contribution benchmark is the contribution level employers need to meet in order to keep pension debt from growing

|| For net amortization positive numbers mean expected progress in paying down pension debt Negative numbers mean expected growth in pension debt

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Pennsylvania $66328481 725 $4808815 $2855906 $7664721 $1470963 $6193758 $6522941 105 $329183

Rhode Island $5454061 700 $381784 $152862 $534646 $96362 $438285 $433127 99 -$5157

South Carolina $25482182 725 $1847458 $1103205 $2950663 $1046631 $1904033 $1710476 90 -$193557

South Dakota -$9075 650 -$590 $222710 $222120 $128237 $93882 $128724 137 $34842

Tennessee $1695312 731 $123939 $853550 $977488 $348831 $628657 $1141243 182 $512586

Texas $55145722 687 $3787172 $6196686 $9983858 $4210268 $5773590 $4280858 74 -$1492733

Utah $3420315 695 $237712 $642590 $880302 $37553 $842749 $1177968 140 $335219

Vermont $2283896 793 $181025 $118295 $299320 $101237 $198082 $199899 101 $1816

Virginia $21480408 700 $1503629 $1888831 $3392460 $891439 $2501020 $2554085 102 $53065

Washington $9883432 737 $728406 $1931582 $2659988 $1100150 $1559838 $2827714 181 $1267876

West Virginia $3917091 750 $293782 $281951 $575733 $164283 $411449 $678234 165 $266785

Wisconsin -$2969118 700 -$207838 $1860937 $1653099 $1006427 $646671 $1065965 165 $419294

Wyoming $2700673 671 $181154 $236862 $418016 $178956 $239060 $178228 75 -$60832

16

Appendix D Details of changes to net pension liability 2018In thousands

StateBeginning of year net

pension liability

End of year net pension

liabilityTotal changes

Net amortization benchmark

Employer + other

contributions

Net amortization

Change to reconcile

Investment experience

Benefit changes

Actuarial experience

Actuarial changes

Alabama $15251096 $15228842 -$22254 $1369188 $1293504 -$75684 -$97938 -$544500 $0 $177032 $269530

Alaska $7243003 $6929477 -$313526 $694030 $556411 -$137619 -$451145 -$17225 $0 -$433920 $0

Arizona $27416368 $25215806 -$2200562 $2600269 $2162496 -$437773 -$2638335 -$826137 -$116011 $515560 -$2211747

Arkansas $7853261 $6508389 -$1344872 $872501 $776295 -$96206 -$1441078 -$959873 $0 $34562 -$515767

California $191130787 $184852140 -$6278647 $20841956 $24116619 $3274664 -$3003983 -$3031295 $668 $2158587 -$2131943

Colorado $54596452 $31507099 -$23089353 $4014647 $1903073 -$2111573 -$25200926 $4206458 -$5980577 $889134 -$24315941

Connecticut $34811035 $35070959 $259924 $2929730 $2840519 -$89212 $170712 $74367 $510940 -$414595 $0

Delaware $1961753 $1761069 -$200684 $281677 $280407 -$1271 -$201955 -$285729 $11154 $89307 -$16687

Florida $40281942 $40704631 $422689 $4393427 $3501282 -$892145 -$469456 -$3049099 $0 $742984 $1836659

Georgia $22889927 $22930800 $40873 $2561609 $2857440 $295831 $336704 -$1164304 $72381 $1084627 $344000

Hawaii $12950306 $13318993 $368687 $1222637 $876760 -$345878 $22810 -$101944 $0 $124753 $0

Idaho $1506653 $1380532 -$126121 $293986 $394422 $100436 -$25684 -$167683 $83585 -$47697 $106111

Illinois $136881554 $140593161 $3711607 $11333437 $8143193 -$3190244 $521363 -$797304 -$374603 $731439 $961832

Indiana $17326203 $14571271 -$2754932 $1709366 $1989838 $280471 -$2474461 -$619782 $0 -$169086 -$1685593

Iowa $6840464 $6481626 -$358838 $854807 $777309 -$77498 -$436336 -$363061 -$1208 -$140228 $68161

Kansas $9128629 $8900507 -$228122 $823625 $921493 $97868 -$130254 -$83111 $0 -$47143 $0

Kentucky $42916062 $28603539 -$14312523 $2847550 $1885289 -$962261 -$15274784 -$1098415 $10513 -$19567 -$14167315

Louisiana $18214179 $17591031 -$623148 $1552242 $2117818 $565576 -$57572 -$696779 $658 -$195920 $834469

Continued on next page

17

Maine $2995575 $2665535 -$330041 $303668 $411397 $107728 -$222312 -$391240 -$106123 $35815 $239236

Maryland $22584000 $21954935 -$629065 $2197359 $2110351 -$87008 -$716073 -$185256 $5505 -$653748 $117426

Massachusetts $35710159 $36941268 $1231109 $3029358 $2674071 -$355287 $875822 -$785503 $0 $194325 $1467000

Michigan $32483291 $37602953 $5119662 $2834285 $3675705 $841420 $5961081 -$2089131 $0 -$64336 $8114548

Minnesota $37198871 $15188717 -$22010154 $3372821 $1399477 -$1973343 -$23983497 -$2573005 -$5765677 $1583 -$15646398

Mississippi $16783124 $16809495 $26371 $1415802 $1073116 -$342685 -$316314 -$354928 $0 $38614 $0

Missouri $15774044 $16635515 $861471 $1498857 $1582607 $83750 $945221 -$404892 -$8 -$7407 $1357528

Montana $4080482 $4381723 $301241 $359673 $362690 $3017 $304258 -$109601 $0 $207538 $206321

Nebraska $1474474 $1526977 $52503 $230380 $320606 $90225 $142728 $119428 $88636 -$65335 $0

Nevada $13319492 $13651509 $332017 $1113217 $970167 -$143051 $188966 -$315116 $0 $504082 $0

New Hampshire

$4965063 $4852683 -$112380 $407022 $444277 $37255 -$75125 -$108669 $0 $29109 $4435

New Jersey $142288433 $130717090 -$11571343 $13341800 $4691558 -$8650242 -$20221585 -$6169156 $0 $850491 -$14902920

New Mexico $16485691 $18166479 $1680788 $1344963 $738207 -$606756 $1074032 -$58134 $0 -$74477 $1206643

New York $11468876 $4238202 -$7230674 $4120187 $4989268 $869081 -$6361593 -$7838038 $0 $1476445 $0

North Carolina $9631900 $12509924 $2878024 $1681154 $2207884 $526731 $3404755 -$100834 $44793 $1199449 $2261347

North Dakota $2987137 $3030258 $43121 $291362 $198577 -$92785 -$49665 -$86485 $0 -$94216 $131036

Ohio $39735633 $50018612 $10282979 $2937048 $3748626 $811578 $11094557 $7711615 $0 -$307530 $3690472

Oklahoma $8548375 $7397822 -$1150553 $945600 $1326526 $380926 -$769626 -$575769 -$113763 -$105401 $25307

Oregon $13480000 $15148600 $1668600 $2065714 $1439274 -$626440 $1042160 -$1272440 $0 $74300 $2240300

Pennsylvania $66328481 $68835965 $2507484 $6193758 $6522941 $329183 $2836667 $3414973 $0 -$578306 $0

Rhode Island $5454061 $5481096 $27035 $438285 $433127 -$5157 $21877 -$50633 $0 $72627 -$116

South Carolina $25482182 $25465724 -$16458 $1904033 $1710476 -$193557 -$210015 -$136380 $0 -$73635 $0

Continued on next page

18

Sources Comprehensive annual financial reports actuarial reports and valuations or other public documents or as provided by plan

copy 2020 The Pew Charitable Trusts

Appendix E Debt driversStatesrsquo improved fiscal position in 2018 was driven by strong investment returnsmdash86 for those reporting on a fiscal year ending June 30mdashthat exceeded plan assumptions On their own investment returns lowered the cumulative funding gap by more than $10 billion although this reduction was offset by insufficient contributions Average performance through the following fiscal year ending June 30 2019 was under 710 Economic conditions in the third quarter of fiscal year 2020 point to a shortfall in meeting investment targets and an increase in unfunded liabilities of up to $500 billion nine months through the fiscal year

States cannot rely on investment income alone to chip away at their accumulated pension debt Pew has collected annual financial data on state-run pension systems since before the recession But even after a decade of economic recovery states have made limited progress in paying down pension debt In fact since 2007 the shortfall between actual contributions to state pension plans and minimum actuarial funding standards was $200 billion11

Changes to plan assumptions also decreased reported liabilities by $30 billion in 2018 however that result is driven by Colorado Kentucky Minnesota and New Jersey where improvements in funded status allowed plans to substantially increase their discount rates The remaining 46 states reported an increase in liabilities of $39 billion from assumption changes

South Dakota -$9075 -$2332 $6743 $93882 $128724 $34842 $41585 -$145567 $0 $5221 $181932

Tennessee $1695312 $1139335 -$555977 $628657 $1141243 $512586 -$43391 -$606253 $17316 -$32315 $577861

Texas $55145722 $76472542 $21326821 $5773590 $4280858 -$1492733 $19834088 -$274164 $2825 $68677 $20036750

Utah $3420315 $5448659 $2028344 $842749 $1177968 $335219 $2363563 $2338849 $0 $24714 $0

Vermont $2283896 $2418440 $134544 $198082 $199899 $1816 $136361 $12217 $194 $156907 -$32957

Virginia $21480408 $20337887 -$1142521 $2501020 $2554085 $53065 -$1089456 -$240348 $10811 -$859919 $0

Washington $9883432 $6048473 -$3834959 $1559838 $2827714 $1267876 -$2567083 -$1546224 $175100 -$118086 -$1077873

West Virginia $3917091 $3357120 -$559971 $411449 $678234 $266785 -$293186 -$279644 $0 -$14504 $962

Wisconsin -$2969118 $3557687 $6526805 $646671 $1065965 $419294 $6946099 $11552920 $0 -$4968302 $361481

Wyoming $2700673 $3642608 $941935 $239060 $178228 -$60832 $881102 $882867 $0 -$67752 $65987

Total $1276007674 $1237791374 -$38216300 $126118030 $114658013 -$11460017 -$49676317 -$10189958 -$11422892 $1934455 -$29997922

19

Change in Pension DebtStrong investment performance and changes in assumptions reduced reported pension debt by $10 billion and $30 billion respectively

Source Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Appendix F Net amortization benchmarkThe benchmark is calculated by taking the sum of service cost (the actuarial value of the benefits earned in 2018 also called normal cost) and interest on the net pension liability at the beginning of the year (each pension planrsquos total pension liability and the net pension liability both grow annually at the planrsquos assumed rate of return) and subtracting employee contributions Employer and employee contributions are adjusted to reflect expected interest After subtracting the $43 billion contributed by workers nationwide in 2018 (including interest) employers would have needed to contribute $126 billion to meet the net amortization benchmark to keep pension debt from growing To actually make progress on closing the funding gap states would have to exceed the contribution benchmark on a consistent basis

In b

illio

ns

$0

$200

$400

$600

$800

$1000

$1200

$1400

2018 netpension liability

Other factorsNetamortization

Changes inassumptions

Investmentgains

2017 netpension liability

$1276 -$10 -$30 -$9$11 $1238

For further information please visit pewtrustsorgpensions

Contact Sarah Jones communications officer Email sjonespewtrustsorg Project website pewtrustsorgpensions

The Pew Charitable Trusts is driven by the power of knowledge to solve todayrsquos most challenging problems Pew applies a rigorous analytical approach to improve public policy inform the public and invigorate civic life

Endnotes1 See Appendix F for more information on the net amortization benchmark

2 For example the US experienced annual gross domestic product (GDP) growth of more than 55 from 1988 through 2007 while the Congressional Budget Office now projects only 4 annual growth for the next decade See Congressional Budget Office ldquoThe Budget and Economic Outlook 2019 to 2029rdquo (2019) httpswwwcbogovsstemfiles2019-0354918-Outlook-3pdf

3 See SEBAC 2017 Agreement httpaftctorgsitesaftctorgfilessebac_2017_ta_signedpdf for details on Connecticut State Employees Retirement System (SERS) pension reforms

4 See Fitch Ratings ldquoConnecticut Teacher Pension Changes Costly but Lower Fiscal Risksrdquo Feb 28 2019 httpswwwfitchratingscomsitepr10064878

5 National Association of State Retirement Administrators ldquoNASRA Issue Brief Public Pension Plan Investment Return Assumptionsrdquo (updated April 2014) httpwwwnasraorgfilesIssue20BriefsNASRAInvReturnAssumptBriefpdf

6 Low return scenario assumes a 5 return

7 K Brainard and A Brown ldquoIn-Depth Risk Sharing in Public Retirement Plansrdquo (National Association of State Retirement Administrators 2018)

8 GASB Statement 67 on Financial Reporting for Pension Plans does also require an adjustment to the discount rate assumptionsmdashresulting in a higher reported pension liabilitymdashif current contribution policies are deemed insufficient However as of 2018 reporting only nine of the largest 100 plans across the 50 states are required to make this adjustment down from 15 in 2017

9 The Pew Charitable Trusts ldquoFoundation for Public Pensions Risk Reportingrdquo (2018) httpswwwhksharvardedusitesdefaultfilescentersmrcbgprogramsFoundation20for20Pensions20Risk20Reporting20(Strawman)pdf

10 Wilshire Trust Universe Comparison Service and Wilshire TUCS are service marks of Wilshire Associates Inc (ldquoWilshirerdquo) and have been licensed for use by The Pew Charitable Trusts All content of Wilshire TUCS is copyright 2019 Wilshire Associates Inc all rights reserved

11 Accounting standards changed in 2014 From 2007 to 2013 the shortfall is calculated between the actuarial recommended contribution and actual employer contributions From 2014 to 2018 the shortfall represents the gap between the net amortization benchmark and employer contributions

5

In contrast states such as Maine and West Virginia that were severely underfunded historically but subsequently adopted strong funding policies kept costs stable and pension debt shrinking through the Great Recession

Lowering return targets and discount rates reduces riskOver the past five years the average assumed rate of return for state pension fund investments has declined from 76 in 2014 to 72 in 2018 This adjustment is based on the expectation that lower economic growth will result in lower future investment performance2 In the 20 years prior to the Great Recession for example many plans averaged returns of 8 however most experts now forecast long-term returns of around 65 for the typical public plan portfolio Recognizing this new economic landscape 42 states have reduced their discount ratesmdashthe figure used to express future liabilities in todayrsquos dollarsmdashsince 2014 including 23 that did so in 2018

Lowering assumed rates of return can help plans reduce the risk of missing return targets and incurring unexpected costs during market downturns However because the present value of future liabilities is typically calculated using the assumed rate of return as the discount rate lowering the discount rate also has the immediate effect of raising calculated liabilities and contributions required from state budgets But there is evidence that plans can adopt more reasonable return assumptions without harming credit ratings or breaking the bank

For example Connecticut reduced the assumed rates of return (and discount rates) for its State Employees Retirement System and Teachersrsquo Retirement System from 8 to 69 in 2017 and 2019 respectively but the state concurrently adopted funding and amortization policies that would stabilize long-term contribution rates3 Collectively these polices help to mitigate the impact of market volatility on plan financials and the statersquos budget while also factoring positively in rating agency scoring4

Setting realistic return assumptions is critical to plan fiscal health given the importance of investment returnsmdashthey make up more than 60 of public pension plan revenue5 However adjusting return assumptions is not the only tool at policymakersrsquo disposal for mitigating economic risk Another strategy is to adopt a formal cost-sharing policy that distributes unexpected cost increasesmdashcosts that result from short- or long-term deviations from plan expectationsmdashbetween employers and plan members

Ensuring cost predictability through cost-sharingThe five years of data also demonstrate the role that cost-sharing plan provisions can play in supporting cost predictability In particular Tennessee Wisconsin and South Dakota report steady and consistent budget costs over the five-year time horizon while remaining at or near full funded status In fact these three states are the only ones in which funded status remained above 90 while pension contribution rates varied by less than 1 of payroll over the five years ending in 2018

This high level of cost predictability reflects the impact of the different cost-sharing features each state employs as part of plan benefit design in addition to consistently making full actuarial contributions each year South Dakota and Wisconsin have a long track record of using variable employee contributions or retiree cost of living adjustments (COLAs) to share the costs of investment shortfallsmdashor the benefits of strong financial marketsmdashwith employees and retirees Tennessee adopted a hybrid plan with cost-sharing policies after weathering the Great Recession

6

In comparison well-funded plans without cost-sharing features struggled to achieve both consistent costs and maintenance of funding levels over the five-year period ending in 2018 For example New York maintained a funded ratio in the high 90s between 2014 and 2018 but experienced fluctuations in employer costs as a percent of payroll of nearly 6 percentage points Data going back to 2008 show even more volatility in costs in which employer contribution rates in the state ranged from 8 to almost 22 of payroll North Carolina a well-funded state without cost-sharing had costs increase significantly over longer time periods about 6 percentage points during the 10-year period and the systemrsquos funded ratio fell by 10 percentage pointsmdashfrom 99 in 2014 to 89 in 2018

The graphic below illustrates how both New York and North Carolina two good examples of well-funded plans without cost-sharing features have experienced greater long-term volatility in costs compared with the three cost-sharing states Wisconsin Tennessee and South Dakota These states were chosen because all five are among the eight best-funded states so the differences we see here are primarily due to differences in cost-sharing features as opposed to differences in payments to address unfunded liabilities

Figure 3

Change in Employer Contribution Rates Since the Great RecessionStates with cost-sharing policies managed to minimize volatility in employer contributions

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Change between 2008 and 2018 Change between 2014 and 2018

0

2

4

6

8

WisconsinTennesseeSouth DakotaNorth CarolinaNew York

-8

-6

-4

-2

7

Pew also looks at expected employer cost going forward to determine if cost-sharing measures can further protect state budgets For example Figure 4 illustrates the employer cost variability metricmdashhow the employer cost as a percent of payroll is projected to change under a low return scenariomdashfor the five states6 Well-funded plans with cost-sharing features tend to fare better South Dakota Wisconsin and Tennessee would see zero or small changes in employer costs while North Carolina and New York experience much larger increases under the same low return scenario

Figure 4

Projected Employer Cost of New Hire Benefits as a Percentage of PayStates vary in how much cost uncertainty they face from the plan design offered to new employees

Notes Under the low return scenario the analysis assumes a 5 return The projected cost of new benefits includes contributions to the defined contribution component of the hybrid in the case of Tennesseersquos hybrid plan The analysis for each state is based on specific retirement systems including New York Employeesrsquo Retirement System Teachersrsquo and State Employeesrsquo Retirement System of North Carolina South Dakota Retirement System Tennessee Hybrid Pension Plan and the Wisconsin Retirement System

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Although cost-sharing features are not required for full funding many states have adopted variable employee contributions or variable COLAs in an effort to reduce the volatility of employer costs and limit ad hoc benefit changes Following the Great Recession many states elected to retroactively share retirement plan risk with members including in some cases reducing COLAs for retirees or increasing contributions for current workers Making cost-sharing part of the benefit design can reduce instances in which workers realize they were bearing risk after an economic downturn or other negative event had already transpired7

0 2 4 6 8 10 12 14 16 18

South Dakota SDRS

Tennessee HybridPension

Wisconsin WRS

North Carolina TSERS

New York ERS

55

57

16

0

0

Expected Low returns

8

Stress testing is emerging as an effective risk management toolMany states may not be prepared for how an economic downturn could affect the costs of their retirement systems The 2014 changes to GASB reporting requirements included a requirement that plans report sensitivity analysis related to investment returns But the requirement is limited to reporting liabilities within a narrow range of alternative investment returns of +- 1 at a single point in time Furthermore it does not require forward-looking projections that account for wider swings in investment returns or the risk of contributions falling short of the levels required by a statersquos own policies8

The experience of the past 20 years shows that states need to consider both of these risk factors more fully To better understand the risks facing state pension plans and ultimately state budgets policymakers are turning to stress testingmdashand the adoption of new actuarial standards that promote its usemdashto assess and manage investment and contribution risk

Stress testing involves the simulation of a range of economic scenarios and investment returns to determine their potential impact on future pension costs and liabilities Building on existing actuarial projections comprehensive stress testing can be a powerful tool for policymakers to understand how pension balance sheets and government budgets will fare during an economic downturn or over a period of lower-than-expected growth It also allows states to evaluate the impact of reform proposals or policy changes

Fourteen states have enacted or are considering adopting stress testing requirements And the results of stress test analyses in Colorado Connecticut and Hawaii demonstrate that this is not an academic exercise

In Colorado a 2015 stress test analysis concluded that the state faced a 1 in 4 chance that the assets in the Public Employeesrsquo Retirement Associationrsquos main fund would be depleted within 25 to 30 years The finding led to reforms that were foundmdashthrough further stress testingmdashto mitigate the risk of insolvency In Connecticut a stress test analysis in 2018 found that although reforms to the State Employees Retirement System had improved the systemrsquos fiscal health additional changes to the teachersrsquo system were needed to avoid substantial cost increases As a result policymakers made reforms to address these risks as well And in Hawaiimdashwhich has issued annual stress test reports since 2017mdashpolicymakers have used the analysis to demonstrate that recent reforms to the statersquos contribution policy have improved the planrsquos fiscal position

We expect the trend of adopting public risk reporting and stress testing to continue as state retirement systems implement the Actuarial Standard of Practice No 51 adopted by the Actuarial Standards Board in September 2017 The new standards require plan actuaries to regularly conduct an assessment of investment contribution and other risks

9

Figure 5

States That Have Enacted or Are Considering Adopting Stress Testing RequirementsTen states require stress testing or risk reporting eight have adopted it since 2017

Note Of the states that have adopted stress testing requirements by statute at least four (Washington California Virginia and Hawaii) have produced at least two stress testing reports as of January 2020 Map is as of April 2020

Source State public documents or as provided by state officials

copy 2020 The Pew Charitable Trusts

These actuarial studies can provide a comprehensive assessment of a range of risk factors including investment contribution and longevity risk But the reports are designed primarily for plan fiduciaries as opposed to a broader set of stakeholders Pewrsquos ldquoFoundation for Public Pensions Risk Reportingrdquo released in November 2018 in collaboration with the Harvard Kennedy Schoolrsquos Mossavar-Rahmani Center for Business and Government was designed to leverage these data in a standard form that is focused on impacts to taxpayers and government budget officials9 And with the impact of COVID-19 on financial markets and pension balance sheets states are already applying Pew and the centerrsquos principles of risk reporting

For example in Montana a stress test report focusing on an asset shock scenario with a significant loss on plan investments similar to the recent downturn beginning in March 2020 was used to assess the sufficiency of the statersquos funding policy entering a recession The results suggest that policymakers will face difficult decisions in terms of strengthening pension funding while revenue is projected to decline Although these decisions are challenging the stress test has provided policymakers with a clear understanding of the goals for pension reform

Risk reporting for public pensions should be accessible to all stakeholders and designed to inform planning and decision-making and to assist government officials and others as they assess the potential impact of the next recession It can be used to quantify the potential cost of investment risk on government budgets evaluate the

WY

AZ

CA

ID

UT

MT

NVOR

WA

NM

OK

TX

AR

CO

IA

KS

LA

MN

MONE

ND

SD

AK HI

WI

AL

IL IN

KY

MS

TN

NY

NC

OH

PA

WV

FL

GA

ME

MI

SC

VA

MA

CT

VT NH

RI

NJ

DEMD

Stress testing requirements Considering

10

impact of contribution risk on pension system financial position and provide a framework to evaluate policy proposals to strengthen state fiscal health

ConclusionAlthough many state and local pension plans are still vulnerable to market volatility and recession others have weathered past economic downturns well In the near-term state and local officials will continue to focus on the COVID-19 pandemic while navigating a host of budget challenges including declining revenue and an increased need for safety net programs As decision-makers confront these challenges a careful evaluation of successful systemsrsquo policies reveals common practices that can serve as a toolkit for policymakers to strengthen their statesrsquo pension plans over the long-term All states should consider

bull Funding at levels that target debt reduction Plans that consistently make annual payments sufficient to pay for current benefits as well as reduce a portion of pension debt are more likely to recover quickly from economic downturns and better weather recessions

bull Decreasing assumed returns and discount rates Forecasts of lower-than-historical economic growth and bond yields over the next 10 to 20 years drive the growing consensus that pension funds should plan for lower long-term investment returns than those of the past

bull Ensuring cost predictability Plans with cost-sharing features were the ones most likely to recover quickly from the downturns of the first decade of the 2000s and to maintain a strong financial position throughout the recovery

bull Employing stress testing and public risk reporting States that regularly assess whether current pension policies are sustainable throughout the economic cycle and over time have the information necessary to ensure that pension plans will be resilient during downturns

There is no one-size-fits-all solution when it comes to plan structure and design However the practices of well-funded plans of all types indicate that these four policy prescriptions can help achieve and maintain fiscal sustainability for pension balance sheets and sponsoring government balance sheets as well as ensure that benefits will be paid to the workers and retirees who depend on them

Appendix A MethodologyAll figures presented are as reported in public documents or as provided by plan officials The main data sources used were the comprehensive annual financial reports produced by each state and pension plan actuarial reports and valuations and other state documents that disclose financial details about public employment retirement systems Pew collected data for more than 230 pension plans

Pew shared the collected data with plan officials to give them an opportunity to review them and to provide additional information This feedback was incorporated into the data presented in this brief

Because of lags in valuation for many state pension plans only partial 2019 data were available and fiscal 2018 is the most recent year for which comprehensive data were available for all 50 states Data on Tennessee aggregate political subdivisions were not available for fiscal 2018 so data were rolled forward from 2017 Data on a subset of California local governments participating in the California Public Employeesrsquo Retirement System were not available in aggregate and were not included in our data

Each state retirement system uses different key assumptions and methods in presenting its financial information Pew made no adjustments or changes to the presentation of aggregate state asset or liability data for this brief

11

Assumptions underlying each statersquos funding data include the assumed rate of return on investments and estimates of employeesrsquo life spans retirement ages salary growth marriage rates retention rates and other demographic characteristics

Appendix B State data 2018In thousands

State Assets (plan net position) Liabilities (total pension liability)

Pension debt (net pension liability) Funded ratio

Alabama $38973099 $54201941 $15228842 719

Alaska $14995615 $21925093 $6929477 684

Arizona $47908905 $73124711 $25215806 655

Arkansas $28149299 $34657689 $6508389 812

California $455619154 $640471294 $184852140 711

Colorado $44906648 $76413747 $31507099 588

Connecticut $30697189 $65768148 $35070959 467

Delaware $10064363 $11825432 $1761069 851

Florida $161429344 $202133975 $40704630 799

Georgia $92155238 $115086038 $22930800 801

Hawaii $16598408 $29917401 $13318993 555

Idaho $16757951 $18138483 $1380532 924

Illinois $89823202 $230416362 $140593161 390

Indiana $28971090 $43542361 $14571271 665

Iowa $33054838 $39536464 $6481626 836

Kansas $19696209 $28596716 $8900507 689

Kentucky $23282022 $51885561 $28603539 449

Louisiana $36140052 $53731083 $17591031 673

Maine $14532362 $17197897 $2665535 845

Maryland $52125680 $74080615 $21954935 704

Massachusetts $56786732 $93728000 $36941268 606

Michigan $64647414 $102250365 $37602952 632

Minnesota $68422729 $83611446 $15188717 818

Continued on next page

12

Mississippi $28135395 $44944890 $16809495 626

Missouri $58211187 $74846702 $16635515 778

Montana $11584819 $15966542 $4381723 726

Nebraska $14256785 $15783762 $1526977 903

Nevada $41560782 $55212291 $13651509 753

New Hampshire $8894798 $13747481 $4852683 647

New Jersey $81526803 $212243893 $130717090 384

New Mexico $28373494 $46539973 $18166479 610

New York $212076811 $216315013 $4238202 980

North Carolina $97635765 $110145689 $12509924 886

North Dakota $5675354 $8705612 $3030258 652

Ohio $157058983 $207077595 $50018612 758

Oklahoma $32237217 $39635039 $7397822 813

Oregon $69327500 $84476100 $15148600 821

Pennsylvania $83300714 $152136679 $68835965 548

Rhode Island $6485178 $11966274 $5481096 542

South Carolina $31207104 $56672828 $25465724 551

South Dakota $12235719 $12233387 -$2332 1000

Tennessee $48996019 $50135354 $1139335 977

Texas $183858309 $260330851 $76472542 706

Utah $31259522 $36708181 $5448659 852

Vermont $4341722 $6760162 $2418440 642

Virginia $76555264 $96893151 $20337887 790

Washington $92610488 $98658961 $6048473 939

West Virginia $15566369 $18923489 $3357120 823

Wisconsin $96737081 $100294768 $3557687 965

Wyoming $7914035 $11556643 $3642608 685

Total $2983360762 $4221152134 $1237791374 707

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

13

State

Beginning of year net

pension liability

Assumed rate of return

(weighted average

across plans)

Assumed interest due on 2018 beginning

of year debt

2018 normal costdagger

2018 total expected

costDagger

2018 employee

contributions with interest

2018 employer

contribution benchmarksect

2018 actual employer

contributions with interest

Percent of employer

benchmark paid

Net amortization||

Alabama $15251096 775 $1181960 $954407 $2136367 $767179 $1369188 $1293504 94 -$75684

Alaska $7243003 800 $579497 $242840 $822336 $128306 $694030 $556411 80 -$137619

Arizona $27416368 774 $2122280 $1825501 $3947780 $1347511 $2600269 $2162496 83 -$437773

Arkansas $7853261 710 $557951 $534527 $1092478 $219977 $872501 $776295 89 -$96206

California $191130787 707 $13503891 $14100694 $27604585 $6762629 $20841956 $24116619 116 $3274664

Colorado $54596452 485 $2648807 $2185834 $4834641 $819995 $4014647 $1903073 47 -$2111573

Connecticut $34811035 733 $2550487 $905880 $3456367 $526637 $2929730 $2840519 97 -$89212

Delaware $1961753 631 $123883 $236947 $360830 $79153 $281677 $280407 100 -$1271

Florida $40281942 617 $2483643 $2682437 $5166080 $772653 $4393427 $3501282 80 -$892145

Georgia $22889927 749 $1714408 $1674041 $3388449 $826840 $2561609 $2857440 112 $295831

Hawaii $12950306 700 $906521 $584470 $1490992 $268354 $1222637 $876760 72 -$345878

Idaho $1506653 710 $106972 $440220 $547193 $253207 $293986 $394422 134 $100436

Illinois $136881554 696 $9523705 $3351603 $12875308 $1541872 $11333437 $8143193 72 -$3190244

Indiana $17326203 675 $1169519 $602253 $1771772 $62405 $1709366 $1989838 116 $280471

Iowa $6840464 701 $479728 $881056 $1360783 $505976 $854807 $777309 91 -$77498

Kansas $9128629 775 $707469 $552423 $1259892 $436267 $823625 $921493 112 $97868

Appendix C Net amortization details 2018In thousands

Continued on next page

14

Kentucky $42916062 457 $1962340 $1344834 $3307174 $459624 $2847550 $1885289 66 -$962261

Louisiana $18214179 767 $1396832 $754930 $2151762 $599520 $1552242 $2117818 136 $565576

Maine $2995575 688 $205946 $293786 $499732 $196064 $303668 $411397 135 $107728

Maryland $22584000 736 $1663262 $1358213 $3021475 $824117 $2197359 $2110351 96 -$87008

Massachusetts $35710159 750 $2678262 $1757434 $4435696 $1406338 $3029358 $2674071 88 -$355287

Michigan $32483291 749 $2432624 $850399 $3283024 $448739 $2834285 $3675705 130 $841420

Minnesota $37198871 570 $2118482 $2394914 $4513396 $1140576 $3372821 $1399477 41 -$1973343

Mississippi $16783124 775 $1300692 $710195 $2010887 $595085 $1415802 $1073116 76 -$342685

Missouri $15774044 758 $1196427 $1233899 $2430326 $931469 $1498857 $1582607 106 $83750

Montana $4080482 769 $313807 $257534 $571341 $211668 $359673 $362690 101 $3017

Nebraska $1474474 804 $118563 $361308 $479872 $249491 $230380 $320606 139 $90225

Nevada $13319492 750 $998962 $1138361 $2137323 $1024105 $1113217 $970167 87 -$143051

New Hampshire $4965063 725 $359849 $273264 $633113 $226092 $407022 $444277 109 $37255

New Jersey $142288433 741 $10539842 $4970779 $15510621 $2168820 $13341800 $4691558 35 -$8650242

New Mexico $16485691 641 $1056961 $879231 $1936192 $591229 $1344963 $738207 55 -$606756

New York $11468876 700 $802821 $3678776 $4481597 $361411 $4120187 $4989268 121 $869081

North Carolina $9631900 721 $694086 $2370680 $3064766 $1383612 $1681154 $2207884 131 $526731

North Dakota $2987137 706 $210885 $244878 $455763 $164401 $291362 $198577 68 -$92785

Ohio $39735633 735 $2920649 $3071713 $5992362 $3055314 $2937048 $3748626 128 $811578

Oklahoma $8548375 747 $638452 $763718 $1402170 $456570 $945600 $1326526 140 $380926

Oregon $13480000 720 $970560 $1108200 $2078760 $13046 $2065714 $1439274 70 -$626440

Continued on next page

15

Note Numbers may not be exact due to rounding

The assumed rate of return is weighted for the plans in each state by the net pension liability at the beginning of 2018

dagger The normal cost refers to the cost of benefits earned by employees in any given year Also called the service cost

Dagger The total expected cost represents the projected increase in the funding gap before taking employer and employee contributions into account It is equal to the normal cost plus the assumed interest on the unfunded liability

sect The employer contribution benchmark is the contribution level employers need to meet in order to keep pension debt from growing

|| For net amortization positive numbers mean expected progress in paying down pension debt Negative numbers mean expected growth in pension debt

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Pennsylvania $66328481 725 $4808815 $2855906 $7664721 $1470963 $6193758 $6522941 105 $329183

Rhode Island $5454061 700 $381784 $152862 $534646 $96362 $438285 $433127 99 -$5157

South Carolina $25482182 725 $1847458 $1103205 $2950663 $1046631 $1904033 $1710476 90 -$193557

South Dakota -$9075 650 -$590 $222710 $222120 $128237 $93882 $128724 137 $34842

Tennessee $1695312 731 $123939 $853550 $977488 $348831 $628657 $1141243 182 $512586

Texas $55145722 687 $3787172 $6196686 $9983858 $4210268 $5773590 $4280858 74 -$1492733

Utah $3420315 695 $237712 $642590 $880302 $37553 $842749 $1177968 140 $335219

Vermont $2283896 793 $181025 $118295 $299320 $101237 $198082 $199899 101 $1816

Virginia $21480408 700 $1503629 $1888831 $3392460 $891439 $2501020 $2554085 102 $53065

Washington $9883432 737 $728406 $1931582 $2659988 $1100150 $1559838 $2827714 181 $1267876

West Virginia $3917091 750 $293782 $281951 $575733 $164283 $411449 $678234 165 $266785

Wisconsin -$2969118 700 -$207838 $1860937 $1653099 $1006427 $646671 $1065965 165 $419294

Wyoming $2700673 671 $181154 $236862 $418016 $178956 $239060 $178228 75 -$60832

16

Appendix D Details of changes to net pension liability 2018In thousands

StateBeginning of year net

pension liability

End of year net pension

liabilityTotal changes

Net amortization benchmark

Employer + other

contributions

Net amortization

Change to reconcile

Investment experience

Benefit changes

Actuarial experience

Actuarial changes

Alabama $15251096 $15228842 -$22254 $1369188 $1293504 -$75684 -$97938 -$544500 $0 $177032 $269530

Alaska $7243003 $6929477 -$313526 $694030 $556411 -$137619 -$451145 -$17225 $0 -$433920 $0

Arizona $27416368 $25215806 -$2200562 $2600269 $2162496 -$437773 -$2638335 -$826137 -$116011 $515560 -$2211747

Arkansas $7853261 $6508389 -$1344872 $872501 $776295 -$96206 -$1441078 -$959873 $0 $34562 -$515767

California $191130787 $184852140 -$6278647 $20841956 $24116619 $3274664 -$3003983 -$3031295 $668 $2158587 -$2131943

Colorado $54596452 $31507099 -$23089353 $4014647 $1903073 -$2111573 -$25200926 $4206458 -$5980577 $889134 -$24315941

Connecticut $34811035 $35070959 $259924 $2929730 $2840519 -$89212 $170712 $74367 $510940 -$414595 $0

Delaware $1961753 $1761069 -$200684 $281677 $280407 -$1271 -$201955 -$285729 $11154 $89307 -$16687

Florida $40281942 $40704631 $422689 $4393427 $3501282 -$892145 -$469456 -$3049099 $0 $742984 $1836659

Georgia $22889927 $22930800 $40873 $2561609 $2857440 $295831 $336704 -$1164304 $72381 $1084627 $344000

Hawaii $12950306 $13318993 $368687 $1222637 $876760 -$345878 $22810 -$101944 $0 $124753 $0

Idaho $1506653 $1380532 -$126121 $293986 $394422 $100436 -$25684 -$167683 $83585 -$47697 $106111

Illinois $136881554 $140593161 $3711607 $11333437 $8143193 -$3190244 $521363 -$797304 -$374603 $731439 $961832

Indiana $17326203 $14571271 -$2754932 $1709366 $1989838 $280471 -$2474461 -$619782 $0 -$169086 -$1685593

Iowa $6840464 $6481626 -$358838 $854807 $777309 -$77498 -$436336 -$363061 -$1208 -$140228 $68161

Kansas $9128629 $8900507 -$228122 $823625 $921493 $97868 -$130254 -$83111 $0 -$47143 $0

Kentucky $42916062 $28603539 -$14312523 $2847550 $1885289 -$962261 -$15274784 -$1098415 $10513 -$19567 -$14167315

Louisiana $18214179 $17591031 -$623148 $1552242 $2117818 $565576 -$57572 -$696779 $658 -$195920 $834469

Continued on next page

17

Maine $2995575 $2665535 -$330041 $303668 $411397 $107728 -$222312 -$391240 -$106123 $35815 $239236

Maryland $22584000 $21954935 -$629065 $2197359 $2110351 -$87008 -$716073 -$185256 $5505 -$653748 $117426

Massachusetts $35710159 $36941268 $1231109 $3029358 $2674071 -$355287 $875822 -$785503 $0 $194325 $1467000

Michigan $32483291 $37602953 $5119662 $2834285 $3675705 $841420 $5961081 -$2089131 $0 -$64336 $8114548

Minnesota $37198871 $15188717 -$22010154 $3372821 $1399477 -$1973343 -$23983497 -$2573005 -$5765677 $1583 -$15646398

Mississippi $16783124 $16809495 $26371 $1415802 $1073116 -$342685 -$316314 -$354928 $0 $38614 $0

Missouri $15774044 $16635515 $861471 $1498857 $1582607 $83750 $945221 -$404892 -$8 -$7407 $1357528

Montana $4080482 $4381723 $301241 $359673 $362690 $3017 $304258 -$109601 $0 $207538 $206321

Nebraska $1474474 $1526977 $52503 $230380 $320606 $90225 $142728 $119428 $88636 -$65335 $0

Nevada $13319492 $13651509 $332017 $1113217 $970167 -$143051 $188966 -$315116 $0 $504082 $0

New Hampshire

$4965063 $4852683 -$112380 $407022 $444277 $37255 -$75125 -$108669 $0 $29109 $4435

New Jersey $142288433 $130717090 -$11571343 $13341800 $4691558 -$8650242 -$20221585 -$6169156 $0 $850491 -$14902920

New Mexico $16485691 $18166479 $1680788 $1344963 $738207 -$606756 $1074032 -$58134 $0 -$74477 $1206643

New York $11468876 $4238202 -$7230674 $4120187 $4989268 $869081 -$6361593 -$7838038 $0 $1476445 $0

North Carolina $9631900 $12509924 $2878024 $1681154 $2207884 $526731 $3404755 -$100834 $44793 $1199449 $2261347

North Dakota $2987137 $3030258 $43121 $291362 $198577 -$92785 -$49665 -$86485 $0 -$94216 $131036

Ohio $39735633 $50018612 $10282979 $2937048 $3748626 $811578 $11094557 $7711615 $0 -$307530 $3690472

Oklahoma $8548375 $7397822 -$1150553 $945600 $1326526 $380926 -$769626 -$575769 -$113763 -$105401 $25307

Oregon $13480000 $15148600 $1668600 $2065714 $1439274 -$626440 $1042160 -$1272440 $0 $74300 $2240300

Pennsylvania $66328481 $68835965 $2507484 $6193758 $6522941 $329183 $2836667 $3414973 $0 -$578306 $0

Rhode Island $5454061 $5481096 $27035 $438285 $433127 -$5157 $21877 -$50633 $0 $72627 -$116

South Carolina $25482182 $25465724 -$16458 $1904033 $1710476 -$193557 -$210015 -$136380 $0 -$73635 $0

Continued on next page

18

Sources Comprehensive annual financial reports actuarial reports and valuations or other public documents or as provided by plan

copy 2020 The Pew Charitable Trusts

Appendix E Debt driversStatesrsquo improved fiscal position in 2018 was driven by strong investment returnsmdash86 for those reporting on a fiscal year ending June 30mdashthat exceeded plan assumptions On their own investment returns lowered the cumulative funding gap by more than $10 billion although this reduction was offset by insufficient contributions Average performance through the following fiscal year ending June 30 2019 was under 710 Economic conditions in the third quarter of fiscal year 2020 point to a shortfall in meeting investment targets and an increase in unfunded liabilities of up to $500 billion nine months through the fiscal year

States cannot rely on investment income alone to chip away at their accumulated pension debt Pew has collected annual financial data on state-run pension systems since before the recession But even after a decade of economic recovery states have made limited progress in paying down pension debt In fact since 2007 the shortfall between actual contributions to state pension plans and minimum actuarial funding standards was $200 billion11

Changes to plan assumptions also decreased reported liabilities by $30 billion in 2018 however that result is driven by Colorado Kentucky Minnesota and New Jersey where improvements in funded status allowed plans to substantially increase their discount rates The remaining 46 states reported an increase in liabilities of $39 billion from assumption changes

South Dakota -$9075 -$2332 $6743 $93882 $128724 $34842 $41585 -$145567 $0 $5221 $181932

Tennessee $1695312 $1139335 -$555977 $628657 $1141243 $512586 -$43391 -$606253 $17316 -$32315 $577861

Texas $55145722 $76472542 $21326821 $5773590 $4280858 -$1492733 $19834088 -$274164 $2825 $68677 $20036750

Utah $3420315 $5448659 $2028344 $842749 $1177968 $335219 $2363563 $2338849 $0 $24714 $0

Vermont $2283896 $2418440 $134544 $198082 $199899 $1816 $136361 $12217 $194 $156907 -$32957

Virginia $21480408 $20337887 -$1142521 $2501020 $2554085 $53065 -$1089456 -$240348 $10811 -$859919 $0

Washington $9883432 $6048473 -$3834959 $1559838 $2827714 $1267876 -$2567083 -$1546224 $175100 -$118086 -$1077873

West Virginia $3917091 $3357120 -$559971 $411449 $678234 $266785 -$293186 -$279644 $0 -$14504 $962

Wisconsin -$2969118 $3557687 $6526805 $646671 $1065965 $419294 $6946099 $11552920 $0 -$4968302 $361481

Wyoming $2700673 $3642608 $941935 $239060 $178228 -$60832 $881102 $882867 $0 -$67752 $65987

Total $1276007674 $1237791374 -$38216300 $126118030 $114658013 -$11460017 -$49676317 -$10189958 -$11422892 $1934455 -$29997922

19

Change in Pension DebtStrong investment performance and changes in assumptions reduced reported pension debt by $10 billion and $30 billion respectively

Source Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Appendix F Net amortization benchmarkThe benchmark is calculated by taking the sum of service cost (the actuarial value of the benefits earned in 2018 also called normal cost) and interest on the net pension liability at the beginning of the year (each pension planrsquos total pension liability and the net pension liability both grow annually at the planrsquos assumed rate of return) and subtracting employee contributions Employer and employee contributions are adjusted to reflect expected interest After subtracting the $43 billion contributed by workers nationwide in 2018 (including interest) employers would have needed to contribute $126 billion to meet the net amortization benchmark to keep pension debt from growing To actually make progress on closing the funding gap states would have to exceed the contribution benchmark on a consistent basis

In b

illio

ns

$0

$200

$400

$600

$800

$1000

$1200

$1400

2018 netpension liability

Other factorsNetamortization

Changes inassumptions

Investmentgains

2017 netpension liability

$1276 -$10 -$30 -$9$11 $1238

For further information please visit pewtrustsorgpensions

Contact Sarah Jones communications officer Email sjonespewtrustsorg Project website pewtrustsorgpensions

The Pew Charitable Trusts is driven by the power of knowledge to solve todayrsquos most challenging problems Pew applies a rigorous analytical approach to improve public policy inform the public and invigorate civic life

Endnotes1 See Appendix F for more information on the net amortization benchmark

2 For example the US experienced annual gross domestic product (GDP) growth of more than 55 from 1988 through 2007 while the Congressional Budget Office now projects only 4 annual growth for the next decade See Congressional Budget Office ldquoThe Budget and Economic Outlook 2019 to 2029rdquo (2019) httpswwwcbogovsstemfiles2019-0354918-Outlook-3pdf

3 See SEBAC 2017 Agreement httpaftctorgsitesaftctorgfilessebac_2017_ta_signedpdf for details on Connecticut State Employees Retirement System (SERS) pension reforms

4 See Fitch Ratings ldquoConnecticut Teacher Pension Changes Costly but Lower Fiscal Risksrdquo Feb 28 2019 httpswwwfitchratingscomsitepr10064878

5 National Association of State Retirement Administrators ldquoNASRA Issue Brief Public Pension Plan Investment Return Assumptionsrdquo (updated April 2014) httpwwwnasraorgfilesIssue20BriefsNASRAInvReturnAssumptBriefpdf

6 Low return scenario assumes a 5 return

7 K Brainard and A Brown ldquoIn-Depth Risk Sharing in Public Retirement Plansrdquo (National Association of State Retirement Administrators 2018)

8 GASB Statement 67 on Financial Reporting for Pension Plans does also require an adjustment to the discount rate assumptionsmdashresulting in a higher reported pension liabilitymdashif current contribution policies are deemed insufficient However as of 2018 reporting only nine of the largest 100 plans across the 50 states are required to make this adjustment down from 15 in 2017

9 The Pew Charitable Trusts ldquoFoundation for Public Pensions Risk Reportingrdquo (2018) httpswwwhksharvardedusitesdefaultfilescentersmrcbgprogramsFoundation20for20Pensions20Risk20Reporting20(Strawman)pdf

10 Wilshire Trust Universe Comparison Service and Wilshire TUCS are service marks of Wilshire Associates Inc (ldquoWilshirerdquo) and have been licensed for use by The Pew Charitable Trusts All content of Wilshire TUCS is copyright 2019 Wilshire Associates Inc all rights reserved

11 Accounting standards changed in 2014 From 2007 to 2013 the shortfall is calculated between the actuarial recommended contribution and actual employer contributions From 2014 to 2018 the shortfall represents the gap between the net amortization benchmark and employer contributions

6

In comparison well-funded plans without cost-sharing features struggled to achieve both consistent costs and maintenance of funding levels over the five-year period ending in 2018 For example New York maintained a funded ratio in the high 90s between 2014 and 2018 but experienced fluctuations in employer costs as a percent of payroll of nearly 6 percentage points Data going back to 2008 show even more volatility in costs in which employer contribution rates in the state ranged from 8 to almost 22 of payroll North Carolina a well-funded state without cost-sharing had costs increase significantly over longer time periods about 6 percentage points during the 10-year period and the systemrsquos funded ratio fell by 10 percentage pointsmdashfrom 99 in 2014 to 89 in 2018

The graphic below illustrates how both New York and North Carolina two good examples of well-funded plans without cost-sharing features have experienced greater long-term volatility in costs compared with the three cost-sharing states Wisconsin Tennessee and South Dakota These states were chosen because all five are among the eight best-funded states so the differences we see here are primarily due to differences in cost-sharing features as opposed to differences in payments to address unfunded liabilities

Figure 3

Change in Employer Contribution Rates Since the Great RecessionStates with cost-sharing policies managed to minimize volatility in employer contributions

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Change between 2008 and 2018 Change between 2014 and 2018

0

2

4

6

8

WisconsinTennesseeSouth DakotaNorth CarolinaNew York

-8

-6

-4

-2

7

Pew also looks at expected employer cost going forward to determine if cost-sharing measures can further protect state budgets For example Figure 4 illustrates the employer cost variability metricmdashhow the employer cost as a percent of payroll is projected to change under a low return scenariomdashfor the five states6 Well-funded plans with cost-sharing features tend to fare better South Dakota Wisconsin and Tennessee would see zero or small changes in employer costs while North Carolina and New York experience much larger increases under the same low return scenario

Figure 4

Projected Employer Cost of New Hire Benefits as a Percentage of PayStates vary in how much cost uncertainty they face from the plan design offered to new employees

Notes Under the low return scenario the analysis assumes a 5 return The projected cost of new benefits includes contributions to the defined contribution component of the hybrid in the case of Tennesseersquos hybrid plan The analysis for each state is based on specific retirement systems including New York Employeesrsquo Retirement System Teachersrsquo and State Employeesrsquo Retirement System of North Carolina South Dakota Retirement System Tennessee Hybrid Pension Plan and the Wisconsin Retirement System

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Although cost-sharing features are not required for full funding many states have adopted variable employee contributions or variable COLAs in an effort to reduce the volatility of employer costs and limit ad hoc benefit changes Following the Great Recession many states elected to retroactively share retirement plan risk with members including in some cases reducing COLAs for retirees or increasing contributions for current workers Making cost-sharing part of the benefit design can reduce instances in which workers realize they were bearing risk after an economic downturn or other negative event had already transpired7

0 2 4 6 8 10 12 14 16 18

South Dakota SDRS

Tennessee HybridPension

Wisconsin WRS

North Carolina TSERS

New York ERS

55

57

16

0

0

Expected Low returns

8

Stress testing is emerging as an effective risk management toolMany states may not be prepared for how an economic downturn could affect the costs of their retirement systems The 2014 changes to GASB reporting requirements included a requirement that plans report sensitivity analysis related to investment returns But the requirement is limited to reporting liabilities within a narrow range of alternative investment returns of +- 1 at a single point in time Furthermore it does not require forward-looking projections that account for wider swings in investment returns or the risk of contributions falling short of the levels required by a statersquos own policies8

The experience of the past 20 years shows that states need to consider both of these risk factors more fully To better understand the risks facing state pension plans and ultimately state budgets policymakers are turning to stress testingmdashand the adoption of new actuarial standards that promote its usemdashto assess and manage investment and contribution risk

Stress testing involves the simulation of a range of economic scenarios and investment returns to determine their potential impact on future pension costs and liabilities Building on existing actuarial projections comprehensive stress testing can be a powerful tool for policymakers to understand how pension balance sheets and government budgets will fare during an economic downturn or over a period of lower-than-expected growth It also allows states to evaluate the impact of reform proposals or policy changes

Fourteen states have enacted or are considering adopting stress testing requirements And the results of stress test analyses in Colorado Connecticut and Hawaii demonstrate that this is not an academic exercise

In Colorado a 2015 stress test analysis concluded that the state faced a 1 in 4 chance that the assets in the Public Employeesrsquo Retirement Associationrsquos main fund would be depleted within 25 to 30 years The finding led to reforms that were foundmdashthrough further stress testingmdashto mitigate the risk of insolvency In Connecticut a stress test analysis in 2018 found that although reforms to the State Employees Retirement System had improved the systemrsquos fiscal health additional changes to the teachersrsquo system were needed to avoid substantial cost increases As a result policymakers made reforms to address these risks as well And in Hawaiimdashwhich has issued annual stress test reports since 2017mdashpolicymakers have used the analysis to demonstrate that recent reforms to the statersquos contribution policy have improved the planrsquos fiscal position

We expect the trend of adopting public risk reporting and stress testing to continue as state retirement systems implement the Actuarial Standard of Practice No 51 adopted by the Actuarial Standards Board in September 2017 The new standards require plan actuaries to regularly conduct an assessment of investment contribution and other risks

9

Figure 5

States That Have Enacted or Are Considering Adopting Stress Testing RequirementsTen states require stress testing or risk reporting eight have adopted it since 2017

Note Of the states that have adopted stress testing requirements by statute at least four (Washington California Virginia and Hawaii) have produced at least two stress testing reports as of January 2020 Map is as of April 2020

Source State public documents or as provided by state officials

copy 2020 The Pew Charitable Trusts

These actuarial studies can provide a comprehensive assessment of a range of risk factors including investment contribution and longevity risk But the reports are designed primarily for plan fiduciaries as opposed to a broader set of stakeholders Pewrsquos ldquoFoundation for Public Pensions Risk Reportingrdquo released in November 2018 in collaboration with the Harvard Kennedy Schoolrsquos Mossavar-Rahmani Center for Business and Government was designed to leverage these data in a standard form that is focused on impacts to taxpayers and government budget officials9 And with the impact of COVID-19 on financial markets and pension balance sheets states are already applying Pew and the centerrsquos principles of risk reporting

For example in Montana a stress test report focusing on an asset shock scenario with a significant loss on plan investments similar to the recent downturn beginning in March 2020 was used to assess the sufficiency of the statersquos funding policy entering a recession The results suggest that policymakers will face difficult decisions in terms of strengthening pension funding while revenue is projected to decline Although these decisions are challenging the stress test has provided policymakers with a clear understanding of the goals for pension reform

Risk reporting for public pensions should be accessible to all stakeholders and designed to inform planning and decision-making and to assist government officials and others as they assess the potential impact of the next recession It can be used to quantify the potential cost of investment risk on government budgets evaluate the

WY

AZ

CA

ID

UT

MT

NVOR

WA

NM

OK

TX

AR

CO

IA

KS

LA

MN

MONE

ND

SD

AK HI

WI

AL

IL IN

KY

MS

TN

NY

NC

OH

PA

WV

FL

GA

ME

MI

SC

VA

MA

CT

VT NH

RI

NJ

DEMD

Stress testing requirements Considering

10

impact of contribution risk on pension system financial position and provide a framework to evaluate policy proposals to strengthen state fiscal health

ConclusionAlthough many state and local pension plans are still vulnerable to market volatility and recession others have weathered past economic downturns well In the near-term state and local officials will continue to focus on the COVID-19 pandemic while navigating a host of budget challenges including declining revenue and an increased need for safety net programs As decision-makers confront these challenges a careful evaluation of successful systemsrsquo policies reveals common practices that can serve as a toolkit for policymakers to strengthen their statesrsquo pension plans over the long-term All states should consider

bull Funding at levels that target debt reduction Plans that consistently make annual payments sufficient to pay for current benefits as well as reduce a portion of pension debt are more likely to recover quickly from economic downturns and better weather recessions

bull Decreasing assumed returns and discount rates Forecasts of lower-than-historical economic growth and bond yields over the next 10 to 20 years drive the growing consensus that pension funds should plan for lower long-term investment returns than those of the past

bull Ensuring cost predictability Plans with cost-sharing features were the ones most likely to recover quickly from the downturns of the first decade of the 2000s and to maintain a strong financial position throughout the recovery

bull Employing stress testing and public risk reporting States that regularly assess whether current pension policies are sustainable throughout the economic cycle and over time have the information necessary to ensure that pension plans will be resilient during downturns

There is no one-size-fits-all solution when it comes to plan structure and design However the practices of well-funded plans of all types indicate that these four policy prescriptions can help achieve and maintain fiscal sustainability for pension balance sheets and sponsoring government balance sheets as well as ensure that benefits will be paid to the workers and retirees who depend on them

Appendix A MethodologyAll figures presented are as reported in public documents or as provided by plan officials The main data sources used were the comprehensive annual financial reports produced by each state and pension plan actuarial reports and valuations and other state documents that disclose financial details about public employment retirement systems Pew collected data for more than 230 pension plans

Pew shared the collected data with plan officials to give them an opportunity to review them and to provide additional information This feedback was incorporated into the data presented in this brief

Because of lags in valuation for many state pension plans only partial 2019 data were available and fiscal 2018 is the most recent year for which comprehensive data were available for all 50 states Data on Tennessee aggregate political subdivisions were not available for fiscal 2018 so data were rolled forward from 2017 Data on a subset of California local governments participating in the California Public Employeesrsquo Retirement System were not available in aggregate and were not included in our data

Each state retirement system uses different key assumptions and methods in presenting its financial information Pew made no adjustments or changes to the presentation of aggregate state asset or liability data for this brief

11

Assumptions underlying each statersquos funding data include the assumed rate of return on investments and estimates of employeesrsquo life spans retirement ages salary growth marriage rates retention rates and other demographic characteristics

Appendix B State data 2018In thousands

State Assets (plan net position) Liabilities (total pension liability)

Pension debt (net pension liability) Funded ratio

Alabama $38973099 $54201941 $15228842 719

Alaska $14995615 $21925093 $6929477 684

Arizona $47908905 $73124711 $25215806 655

Arkansas $28149299 $34657689 $6508389 812

California $455619154 $640471294 $184852140 711

Colorado $44906648 $76413747 $31507099 588

Connecticut $30697189 $65768148 $35070959 467

Delaware $10064363 $11825432 $1761069 851

Florida $161429344 $202133975 $40704630 799

Georgia $92155238 $115086038 $22930800 801

Hawaii $16598408 $29917401 $13318993 555

Idaho $16757951 $18138483 $1380532 924

Illinois $89823202 $230416362 $140593161 390

Indiana $28971090 $43542361 $14571271 665

Iowa $33054838 $39536464 $6481626 836

Kansas $19696209 $28596716 $8900507 689

Kentucky $23282022 $51885561 $28603539 449

Louisiana $36140052 $53731083 $17591031 673

Maine $14532362 $17197897 $2665535 845

Maryland $52125680 $74080615 $21954935 704

Massachusetts $56786732 $93728000 $36941268 606

Michigan $64647414 $102250365 $37602952 632

Minnesota $68422729 $83611446 $15188717 818

Continued on next page

12

Mississippi $28135395 $44944890 $16809495 626

Missouri $58211187 $74846702 $16635515 778

Montana $11584819 $15966542 $4381723 726

Nebraska $14256785 $15783762 $1526977 903

Nevada $41560782 $55212291 $13651509 753

New Hampshire $8894798 $13747481 $4852683 647

New Jersey $81526803 $212243893 $130717090 384

New Mexico $28373494 $46539973 $18166479 610

New York $212076811 $216315013 $4238202 980

North Carolina $97635765 $110145689 $12509924 886

North Dakota $5675354 $8705612 $3030258 652

Ohio $157058983 $207077595 $50018612 758

Oklahoma $32237217 $39635039 $7397822 813

Oregon $69327500 $84476100 $15148600 821

Pennsylvania $83300714 $152136679 $68835965 548

Rhode Island $6485178 $11966274 $5481096 542

South Carolina $31207104 $56672828 $25465724 551

South Dakota $12235719 $12233387 -$2332 1000

Tennessee $48996019 $50135354 $1139335 977

Texas $183858309 $260330851 $76472542 706

Utah $31259522 $36708181 $5448659 852

Vermont $4341722 $6760162 $2418440 642

Virginia $76555264 $96893151 $20337887 790

Washington $92610488 $98658961 $6048473 939

West Virginia $15566369 $18923489 $3357120 823

Wisconsin $96737081 $100294768 $3557687 965

Wyoming $7914035 $11556643 $3642608 685

Total $2983360762 $4221152134 $1237791374 707

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

13

State

Beginning of year net

pension liability

Assumed rate of return

(weighted average

across plans)

Assumed interest due on 2018 beginning

of year debt

2018 normal costdagger

2018 total expected

costDagger

2018 employee

contributions with interest

2018 employer

contribution benchmarksect

2018 actual employer

contributions with interest

Percent of employer

benchmark paid

Net amortization||

Alabama $15251096 775 $1181960 $954407 $2136367 $767179 $1369188 $1293504 94 -$75684

Alaska $7243003 800 $579497 $242840 $822336 $128306 $694030 $556411 80 -$137619

Arizona $27416368 774 $2122280 $1825501 $3947780 $1347511 $2600269 $2162496 83 -$437773

Arkansas $7853261 710 $557951 $534527 $1092478 $219977 $872501 $776295 89 -$96206

California $191130787 707 $13503891 $14100694 $27604585 $6762629 $20841956 $24116619 116 $3274664

Colorado $54596452 485 $2648807 $2185834 $4834641 $819995 $4014647 $1903073 47 -$2111573

Connecticut $34811035 733 $2550487 $905880 $3456367 $526637 $2929730 $2840519 97 -$89212

Delaware $1961753 631 $123883 $236947 $360830 $79153 $281677 $280407 100 -$1271

Florida $40281942 617 $2483643 $2682437 $5166080 $772653 $4393427 $3501282 80 -$892145

Georgia $22889927 749 $1714408 $1674041 $3388449 $826840 $2561609 $2857440 112 $295831

Hawaii $12950306 700 $906521 $584470 $1490992 $268354 $1222637 $876760 72 -$345878

Idaho $1506653 710 $106972 $440220 $547193 $253207 $293986 $394422 134 $100436

Illinois $136881554 696 $9523705 $3351603 $12875308 $1541872 $11333437 $8143193 72 -$3190244

Indiana $17326203 675 $1169519 $602253 $1771772 $62405 $1709366 $1989838 116 $280471

Iowa $6840464 701 $479728 $881056 $1360783 $505976 $854807 $777309 91 -$77498

Kansas $9128629 775 $707469 $552423 $1259892 $436267 $823625 $921493 112 $97868

Appendix C Net amortization details 2018In thousands

Continued on next page

14

Kentucky $42916062 457 $1962340 $1344834 $3307174 $459624 $2847550 $1885289 66 -$962261

Louisiana $18214179 767 $1396832 $754930 $2151762 $599520 $1552242 $2117818 136 $565576

Maine $2995575 688 $205946 $293786 $499732 $196064 $303668 $411397 135 $107728

Maryland $22584000 736 $1663262 $1358213 $3021475 $824117 $2197359 $2110351 96 -$87008

Massachusetts $35710159 750 $2678262 $1757434 $4435696 $1406338 $3029358 $2674071 88 -$355287

Michigan $32483291 749 $2432624 $850399 $3283024 $448739 $2834285 $3675705 130 $841420

Minnesota $37198871 570 $2118482 $2394914 $4513396 $1140576 $3372821 $1399477 41 -$1973343

Mississippi $16783124 775 $1300692 $710195 $2010887 $595085 $1415802 $1073116 76 -$342685

Missouri $15774044 758 $1196427 $1233899 $2430326 $931469 $1498857 $1582607 106 $83750

Montana $4080482 769 $313807 $257534 $571341 $211668 $359673 $362690 101 $3017

Nebraska $1474474 804 $118563 $361308 $479872 $249491 $230380 $320606 139 $90225

Nevada $13319492 750 $998962 $1138361 $2137323 $1024105 $1113217 $970167 87 -$143051

New Hampshire $4965063 725 $359849 $273264 $633113 $226092 $407022 $444277 109 $37255

New Jersey $142288433 741 $10539842 $4970779 $15510621 $2168820 $13341800 $4691558 35 -$8650242

New Mexico $16485691 641 $1056961 $879231 $1936192 $591229 $1344963 $738207 55 -$606756

New York $11468876 700 $802821 $3678776 $4481597 $361411 $4120187 $4989268 121 $869081

North Carolina $9631900 721 $694086 $2370680 $3064766 $1383612 $1681154 $2207884 131 $526731

North Dakota $2987137 706 $210885 $244878 $455763 $164401 $291362 $198577 68 -$92785

Ohio $39735633 735 $2920649 $3071713 $5992362 $3055314 $2937048 $3748626 128 $811578

Oklahoma $8548375 747 $638452 $763718 $1402170 $456570 $945600 $1326526 140 $380926

Oregon $13480000 720 $970560 $1108200 $2078760 $13046 $2065714 $1439274 70 -$626440

Continued on next page

15

Note Numbers may not be exact due to rounding

The assumed rate of return is weighted for the plans in each state by the net pension liability at the beginning of 2018

dagger The normal cost refers to the cost of benefits earned by employees in any given year Also called the service cost

Dagger The total expected cost represents the projected increase in the funding gap before taking employer and employee contributions into account It is equal to the normal cost plus the assumed interest on the unfunded liability

sect The employer contribution benchmark is the contribution level employers need to meet in order to keep pension debt from growing

|| For net amortization positive numbers mean expected progress in paying down pension debt Negative numbers mean expected growth in pension debt

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Pennsylvania $66328481 725 $4808815 $2855906 $7664721 $1470963 $6193758 $6522941 105 $329183

Rhode Island $5454061 700 $381784 $152862 $534646 $96362 $438285 $433127 99 -$5157

South Carolina $25482182 725 $1847458 $1103205 $2950663 $1046631 $1904033 $1710476 90 -$193557

South Dakota -$9075 650 -$590 $222710 $222120 $128237 $93882 $128724 137 $34842

Tennessee $1695312 731 $123939 $853550 $977488 $348831 $628657 $1141243 182 $512586

Texas $55145722 687 $3787172 $6196686 $9983858 $4210268 $5773590 $4280858 74 -$1492733

Utah $3420315 695 $237712 $642590 $880302 $37553 $842749 $1177968 140 $335219

Vermont $2283896 793 $181025 $118295 $299320 $101237 $198082 $199899 101 $1816

Virginia $21480408 700 $1503629 $1888831 $3392460 $891439 $2501020 $2554085 102 $53065

Washington $9883432 737 $728406 $1931582 $2659988 $1100150 $1559838 $2827714 181 $1267876

West Virginia $3917091 750 $293782 $281951 $575733 $164283 $411449 $678234 165 $266785

Wisconsin -$2969118 700 -$207838 $1860937 $1653099 $1006427 $646671 $1065965 165 $419294

Wyoming $2700673 671 $181154 $236862 $418016 $178956 $239060 $178228 75 -$60832

16

Appendix D Details of changes to net pension liability 2018In thousands

StateBeginning of year net

pension liability

End of year net pension

liabilityTotal changes

Net amortization benchmark

Employer + other

contributions

Net amortization

Change to reconcile

Investment experience

Benefit changes

Actuarial experience

Actuarial changes

Alabama $15251096 $15228842 -$22254 $1369188 $1293504 -$75684 -$97938 -$544500 $0 $177032 $269530

Alaska $7243003 $6929477 -$313526 $694030 $556411 -$137619 -$451145 -$17225 $0 -$433920 $0

Arizona $27416368 $25215806 -$2200562 $2600269 $2162496 -$437773 -$2638335 -$826137 -$116011 $515560 -$2211747

Arkansas $7853261 $6508389 -$1344872 $872501 $776295 -$96206 -$1441078 -$959873 $0 $34562 -$515767

California $191130787 $184852140 -$6278647 $20841956 $24116619 $3274664 -$3003983 -$3031295 $668 $2158587 -$2131943

Colorado $54596452 $31507099 -$23089353 $4014647 $1903073 -$2111573 -$25200926 $4206458 -$5980577 $889134 -$24315941

Connecticut $34811035 $35070959 $259924 $2929730 $2840519 -$89212 $170712 $74367 $510940 -$414595 $0

Delaware $1961753 $1761069 -$200684 $281677 $280407 -$1271 -$201955 -$285729 $11154 $89307 -$16687

Florida $40281942 $40704631 $422689 $4393427 $3501282 -$892145 -$469456 -$3049099 $0 $742984 $1836659

Georgia $22889927 $22930800 $40873 $2561609 $2857440 $295831 $336704 -$1164304 $72381 $1084627 $344000

Hawaii $12950306 $13318993 $368687 $1222637 $876760 -$345878 $22810 -$101944 $0 $124753 $0

Idaho $1506653 $1380532 -$126121 $293986 $394422 $100436 -$25684 -$167683 $83585 -$47697 $106111

Illinois $136881554 $140593161 $3711607 $11333437 $8143193 -$3190244 $521363 -$797304 -$374603 $731439 $961832

Indiana $17326203 $14571271 -$2754932 $1709366 $1989838 $280471 -$2474461 -$619782 $0 -$169086 -$1685593

Iowa $6840464 $6481626 -$358838 $854807 $777309 -$77498 -$436336 -$363061 -$1208 -$140228 $68161

Kansas $9128629 $8900507 -$228122 $823625 $921493 $97868 -$130254 -$83111 $0 -$47143 $0

Kentucky $42916062 $28603539 -$14312523 $2847550 $1885289 -$962261 -$15274784 -$1098415 $10513 -$19567 -$14167315

Louisiana $18214179 $17591031 -$623148 $1552242 $2117818 $565576 -$57572 -$696779 $658 -$195920 $834469

Continued on next page

17

Maine $2995575 $2665535 -$330041 $303668 $411397 $107728 -$222312 -$391240 -$106123 $35815 $239236

Maryland $22584000 $21954935 -$629065 $2197359 $2110351 -$87008 -$716073 -$185256 $5505 -$653748 $117426

Massachusetts $35710159 $36941268 $1231109 $3029358 $2674071 -$355287 $875822 -$785503 $0 $194325 $1467000

Michigan $32483291 $37602953 $5119662 $2834285 $3675705 $841420 $5961081 -$2089131 $0 -$64336 $8114548

Minnesota $37198871 $15188717 -$22010154 $3372821 $1399477 -$1973343 -$23983497 -$2573005 -$5765677 $1583 -$15646398

Mississippi $16783124 $16809495 $26371 $1415802 $1073116 -$342685 -$316314 -$354928 $0 $38614 $0

Missouri $15774044 $16635515 $861471 $1498857 $1582607 $83750 $945221 -$404892 -$8 -$7407 $1357528

Montana $4080482 $4381723 $301241 $359673 $362690 $3017 $304258 -$109601 $0 $207538 $206321

Nebraska $1474474 $1526977 $52503 $230380 $320606 $90225 $142728 $119428 $88636 -$65335 $0

Nevada $13319492 $13651509 $332017 $1113217 $970167 -$143051 $188966 -$315116 $0 $504082 $0

New Hampshire

$4965063 $4852683 -$112380 $407022 $444277 $37255 -$75125 -$108669 $0 $29109 $4435

New Jersey $142288433 $130717090 -$11571343 $13341800 $4691558 -$8650242 -$20221585 -$6169156 $0 $850491 -$14902920

New Mexico $16485691 $18166479 $1680788 $1344963 $738207 -$606756 $1074032 -$58134 $0 -$74477 $1206643

New York $11468876 $4238202 -$7230674 $4120187 $4989268 $869081 -$6361593 -$7838038 $0 $1476445 $0

North Carolina $9631900 $12509924 $2878024 $1681154 $2207884 $526731 $3404755 -$100834 $44793 $1199449 $2261347

North Dakota $2987137 $3030258 $43121 $291362 $198577 -$92785 -$49665 -$86485 $0 -$94216 $131036

Ohio $39735633 $50018612 $10282979 $2937048 $3748626 $811578 $11094557 $7711615 $0 -$307530 $3690472

Oklahoma $8548375 $7397822 -$1150553 $945600 $1326526 $380926 -$769626 -$575769 -$113763 -$105401 $25307

Oregon $13480000 $15148600 $1668600 $2065714 $1439274 -$626440 $1042160 -$1272440 $0 $74300 $2240300

Pennsylvania $66328481 $68835965 $2507484 $6193758 $6522941 $329183 $2836667 $3414973 $0 -$578306 $0

Rhode Island $5454061 $5481096 $27035 $438285 $433127 -$5157 $21877 -$50633 $0 $72627 -$116

South Carolina $25482182 $25465724 -$16458 $1904033 $1710476 -$193557 -$210015 -$136380 $0 -$73635 $0

Continued on next page

18

Sources Comprehensive annual financial reports actuarial reports and valuations or other public documents or as provided by plan

copy 2020 The Pew Charitable Trusts

Appendix E Debt driversStatesrsquo improved fiscal position in 2018 was driven by strong investment returnsmdash86 for those reporting on a fiscal year ending June 30mdashthat exceeded plan assumptions On their own investment returns lowered the cumulative funding gap by more than $10 billion although this reduction was offset by insufficient contributions Average performance through the following fiscal year ending June 30 2019 was under 710 Economic conditions in the third quarter of fiscal year 2020 point to a shortfall in meeting investment targets and an increase in unfunded liabilities of up to $500 billion nine months through the fiscal year

States cannot rely on investment income alone to chip away at their accumulated pension debt Pew has collected annual financial data on state-run pension systems since before the recession But even after a decade of economic recovery states have made limited progress in paying down pension debt In fact since 2007 the shortfall between actual contributions to state pension plans and minimum actuarial funding standards was $200 billion11

Changes to plan assumptions also decreased reported liabilities by $30 billion in 2018 however that result is driven by Colorado Kentucky Minnesota and New Jersey where improvements in funded status allowed plans to substantially increase their discount rates The remaining 46 states reported an increase in liabilities of $39 billion from assumption changes

South Dakota -$9075 -$2332 $6743 $93882 $128724 $34842 $41585 -$145567 $0 $5221 $181932

Tennessee $1695312 $1139335 -$555977 $628657 $1141243 $512586 -$43391 -$606253 $17316 -$32315 $577861

Texas $55145722 $76472542 $21326821 $5773590 $4280858 -$1492733 $19834088 -$274164 $2825 $68677 $20036750

Utah $3420315 $5448659 $2028344 $842749 $1177968 $335219 $2363563 $2338849 $0 $24714 $0

Vermont $2283896 $2418440 $134544 $198082 $199899 $1816 $136361 $12217 $194 $156907 -$32957

Virginia $21480408 $20337887 -$1142521 $2501020 $2554085 $53065 -$1089456 -$240348 $10811 -$859919 $0

Washington $9883432 $6048473 -$3834959 $1559838 $2827714 $1267876 -$2567083 -$1546224 $175100 -$118086 -$1077873

West Virginia $3917091 $3357120 -$559971 $411449 $678234 $266785 -$293186 -$279644 $0 -$14504 $962

Wisconsin -$2969118 $3557687 $6526805 $646671 $1065965 $419294 $6946099 $11552920 $0 -$4968302 $361481

Wyoming $2700673 $3642608 $941935 $239060 $178228 -$60832 $881102 $882867 $0 -$67752 $65987

Total $1276007674 $1237791374 -$38216300 $126118030 $114658013 -$11460017 -$49676317 -$10189958 -$11422892 $1934455 -$29997922

19

Change in Pension DebtStrong investment performance and changes in assumptions reduced reported pension debt by $10 billion and $30 billion respectively

Source Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Appendix F Net amortization benchmarkThe benchmark is calculated by taking the sum of service cost (the actuarial value of the benefits earned in 2018 also called normal cost) and interest on the net pension liability at the beginning of the year (each pension planrsquos total pension liability and the net pension liability both grow annually at the planrsquos assumed rate of return) and subtracting employee contributions Employer and employee contributions are adjusted to reflect expected interest After subtracting the $43 billion contributed by workers nationwide in 2018 (including interest) employers would have needed to contribute $126 billion to meet the net amortization benchmark to keep pension debt from growing To actually make progress on closing the funding gap states would have to exceed the contribution benchmark on a consistent basis

In b

illio

ns

$0

$200

$400

$600

$800

$1000

$1200

$1400

2018 netpension liability

Other factorsNetamortization

Changes inassumptions

Investmentgains

2017 netpension liability

$1276 -$10 -$30 -$9$11 $1238

For further information please visit pewtrustsorgpensions

Contact Sarah Jones communications officer Email sjonespewtrustsorg Project website pewtrustsorgpensions

The Pew Charitable Trusts is driven by the power of knowledge to solve todayrsquos most challenging problems Pew applies a rigorous analytical approach to improve public policy inform the public and invigorate civic life

Endnotes1 See Appendix F for more information on the net amortization benchmark

2 For example the US experienced annual gross domestic product (GDP) growth of more than 55 from 1988 through 2007 while the Congressional Budget Office now projects only 4 annual growth for the next decade See Congressional Budget Office ldquoThe Budget and Economic Outlook 2019 to 2029rdquo (2019) httpswwwcbogovsstemfiles2019-0354918-Outlook-3pdf

3 See SEBAC 2017 Agreement httpaftctorgsitesaftctorgfilessebac_2017_ta_signedpdf for details on Connecticut State Employees Retirement System (SERS) pension reforms

4 See Fitch Ratings ldquoConnecticut Teacher Pension Changes Costly but Lower Fiscal Risksrdquo Feb 28 2019 httpswwwfitchratingscomsitepr10064878

5 National Association of State Retirement Administrators ldquoNASRA Issue Brief Public Pension Plan Investment Return Assumptionsrdquo (updated April 2014) httpwwwnasraorgfilesIssue20BriefsNASRAInvReturnAssumptBriefpdf

6 Low return scenario assumes a 5 return

7 K Brainard and A Brown ldquoIn-Depth Risk Sharing in Public Retirement Plansrdquo (National Association of State Retirement Administrators 2018)

8 GASB Statement 67 on Financial Reporting for Pension Plans does also require an adjustment to the discount rate assumptionsmdashresulting in a higher reported pension liabilitymdashif current contribution policies are deemed insufficient However as of 2018 reporting only nine of the largest 100 plans across the 50 states are required to make this adjustment down from 15 in 2017

9 The Pew Charitable Trusts ldquoFoundation for Public Pensions Risk Reportingrdquo (2018) httpswwwhksharvardedusitesdefaultfilescentersmrcbgprogramsFoundation20for20Pensions20Risk20Reporting20(Strawman)pdf

10 Wilshire Trust Universe Comparison Service and Wilshire TUCS are service marks of Wilshire Associates Inc (ldquoWilshirerdquo) and have been licensed for use by The Pew Charitable Trusts All content of Wilshire TUCS is copyright 2019 Wilshire Associates Inc all rights reserved

11 Accounting standards changed in 2014 From 2007 to 2013 the shortfall is calculated between the actuarial recommended contribution and actual employer contributions From 2014 to 2018 the shortfall represents the gap between the net amortization benchmark and employer contributions

7

Pew also looks at expected employer cost going forward to determine if cost-sharing measures can further protect state budgets For example Figure 4 illustrates the employer cost variability metricmdashhow the employer cost as a percent of payroll is projected to change under a low return scenariomdashfor the five states6 Well-funded plans with cost-sharing features tend to fare better South Dakota Wisconsin and Tennessee would see zero or small changes in employer costs while North Carolina and New York experience much larger increases under the same low return scenario

Figure 4

Projected Employer Cost of New Hire Benefits as a Percentage of PayStates vary in how much cost uncertainty they face from the plan design offered to new employees

Notes Under the low return scenario the analysis assumes a 5 return The projected cost of new benefits includes contributions to the defined contribution component of the hybrid in the case of Tennesseersquos hybrid plan The analysis for each state is based on specific retirement systems including New York Employeesrsquo Retirement System Teachersrsquo and State Employeesrsquo Retirement System of North Carolina South Dakota Retirement System Tennessee Hybrid Pension Plan and the Wisconsin Retirement System

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Although cost-sharing features are not required for full funding many states have adopted variable employee contributions or variable COLAs in an effort to reduce the volatility of employer costs and limit ad hoc benefit changes Following the Great Recession many states elected to retroactively share retirement plan risk with members including in some cases reducing COLAs for retirees or increasing contributions for current workers Making cost-sharing part of the benefit design can reduce instances in which workers realize they were bearing risk after an economic downturn or other negative event had already transpired7

0 2 4 6 8 10 12 14 16 18

South Dakota SDRS

Tennessee HybridPension

Wisconsin WRS

North Carolina TSERS

New York ERS

55

57

16

0

0

Expected Low returns

8

Stress testing is emerging as an effective risk management toolMany states may not be prepared for how an economic downturn could affect the costs of their retirement systems The 2014 changes to GASB reporting requirements included a requirement that plans report sensitivity analysis related to investment returns But the requirement is limited to reporting liabilities within a narrow range of alternative investment returns of +- 1 at a single point in time Furthermore it does not require forward-looking projections that account for wider swings in investment returns or the risk of contributions falling short of the levels required by a statersquos own policies8

The experience of the past 20 years shows that states need to consider both of these risk factors more fully To better understand the risks facing state pension plans and ultimately state budgets policymakers are turning to stress testingmdashand the adoption of new actuarial standards that promote its usemdashto assess and manage investment and contribution risk

Stress testing involves the simulation of a range of economic scenarios and investment returns to determine their potential impact on future pension costs and liabilities Building on existing actuarial projections comprehensive stress testing can be a powerful tool for policymakers to understand how pension balance sheets and government budgets will fare during an economic downturn or over a period of lower-than-expected growth It also allows states to evaluate the impact of reform proposals or policy changes

Fourteen states have enacted or are considering adopting stress testing requirements And the results of stress test analyses in Colorado Connecticut and Hawaii demonstrate that this is not an academic exercise

In Colorado a 2015 stress test analysis concluded that the state faced a 1 in 4 chance that the assets in the Public Employeesrsquo Retirement Associationrsquos main fund would be depleted within 25 to 30 years The finding led to reforms that were foundmdashthrough further stress testingmdashto mitigate the risk of insolvency In Connecticut a stress test analysis in 2018 found that although reforms to the State Employees Retirement System had improved the systemrsquos fiscal health additional changes to the teachersrsquo system were needed to avoid substantial cost increases As a result policymakers made reforms to address these risks as well And in Hawaiimdashwhich has issued annual stress test reports since 2017mdashpolicymakers have used the analysis to demonstrate that recent reforms to the statersquos contribution policy have improved the planrsquos fiscal position

We expect the trend of adopting public risk reporting and stress testing to continue as state retirement systems implement the Actuarial Standard of Practice No 51 adopted by the Actuarial Standards Board in September 2017 The new standards require plan actuaries to regularly conduct an assessment of investment contribution and other risks

9

Figure 5

States That Have Enacted or Are Considering Adopting Stress Testing RequirementsTen states require stress testing or risk reporting eight have adopted it since 2017

Note Of the states that have adopted stress testing requirements by statute at least four (Washington California Virginia and Hawaii) have produced at least two stress testing reports as of January 2020 Map is as of April 2020

Source State public documents or as provided by state officials

copy 2020 The Pew Charitable Trusts

These actuarial studies can provide a comprehensive assessment of a range of risk factors including investment contribution and longevity risk But the reports are designed primarily for plan fiduciaries as opposed to a broader set of stakeholders Pewrsquos ldquoFoundation for Public Pensions Risk Reportingrdquo released in November 2018 in collaboration with the Harvard Kennedy Schoolrsquos Mossavar-Rahmani Center for Business and Government was designed to leverage these data in a standard form that is focused on impacts to taxpayers and government budget officials9 And with the impact of COVID-19 on financial markets and pension balance sheets states are already applying Pew and the centerrsquos principles of risk reporting

For example in Montana a stress test report focusing on an asset shock scenario with a significant loss on plan investments similar to the recent downturn beginning in March 2020 was used to assess the sufficiency of the statersquos funding policy entering a recession The results suggest that policymakers will face difficult decisions in terms of strengthening pension funding while revenue is projected to decline Although these decisions are challenging the stress test has provided policymakers with a clear understanding of the goals for pension reform

Risk reporting for public pensions should be accessible to all stakeholders and designed to inform planning and decision-making and to assist government officials and others as they assess the potential impact of the next recession It can be used to quantify the potential cost of investment risk on government budgets evaluate the

WY

AZ

CA

ID

UT

MT

NVOR

WA

NM

OK

TX

AR

CO

IA

KS

LA

MN

MONE

ND

SD

AK HI

WI

AL

IL IN

KY

MS

TN

NY

NC

OH

PA

WV

FL

GA

ME

MI

SC

VA

MA

CT

VT NH

RI

NJ

DEMD

Stress testing requirements Considering

10

impact of contribution risk on pension system financial position and provide a framework to evaluate policy proposals to strengthen state fiscal health

ConclusionAlthough many state and local pension plans are still vulnerable to market volatility and recession others have weathered past economic downturns well In the near-term state and local officials will continue to focus on the COVID-19 pandemic while navigating a host of budget challenges including declining revenue and an increased need for safety net programs As decision-makers confront these challenges a careful evaluation of successful systemsrsquo policies reveals common practices that can serve as a toolkit for policymakers to strengthen their statesrsquo pension plans over the long-term All states should consider

bull Funding at levels that target debt reduction Plans that consistently make annual payments sufficient to pay for current benefits as well as reduce a portion of pension debt are more likely to recover quickly from economic downturns and better weather recessions

bull Decreasing assumed returns and discount rates Forecasts of lower-than-historical economic growth and bond yields over the next 10 to 20 years drive the growing consensus that pension funds should plan for lower long-term investment returns than those of the past

bull Ensuring cost predictability Plans with cost-sharing features were the ones most likely to recover quickly from the downturns of the first decade of the 2000s and to maintain a strong financial position throughout the recovery

bull Employing stress testing and public risk reporting States that regularly assess whether current pension policies are sustainable throughout the economic cycle and over time have the information necessary to ensure that pension plans will be resilient during downturns

There is no one-size-fits-all solution when it comes to plan structure and design However the practices of well-funded plans of all types indicate that these four policy prescriptions can help achieve and maintain fiscal sustainability for pension balance sheets and sponsoring government balance sheets as well as ensure that benefits will be paid to the workers and retirees who depend on them

Appendix A MethodologyAll figures presented are as reported in public documents or as provided by plan officials The main data sources used were the comprehensive annual financial reports produced by each state and pension plan actuarial reports and valuations and other state documents that disclose financial details about public employment retirement systems Pew collected data for more than 230 pension plans

Pew shared the collected data with plan officials to give them an opportunity to review them and to provide additional information This feedback was incorporated into the data presented in this brief

Because of lags in valuation for many state pension plans only partial 2019 data were available and fiscal 2018 is the most recent year for which comprehensive data were available for all 50 states Data on Tennessee aggregate political subdivisions were not available for fiscal 2018 so data were rolled forward from 2017 Data on a subset of California local governments participating in the California Public Employeesrsquo Retirement System were not available in aggregate and were not included in our data

Each state retirement system uses different key assumptions and methods in presenting its financial information Pew made no adjustments or changes to the presentation of aggregate state asset or liability data for this brief

11

Assumptions underlying each statersquos funding data include the assumed rate of return on investments and estimates of employeesrsquo life spans retirement ages salary growth marriage rates retention rates and other demographic characteristics

Appendix B State data 2018In thousands

State Assets (plan net position) Liabilities (total pension liability)

Pension debt (net pension liability) Funded ratio

Alabama $38973099 $54201941 $15228842 719

Alaska $14995615 $21925093 $6929477 684

Arizona $47908905 $73124711 $25215806 655

Arkansas $28149299 $34657689 $6508389 812

California $455619154 $640471294 $184852140 711

Colorado $44906648 $76413747 $31507099 588

Connecticut $30697189 $65768148 $35070959 467

Delaware $10064363 $11825432 $1761069 851

Florida $161429344 $202133975 $40704630 799

Georgia $92155238 $115086038 $22930800 801

Hawaii $16598408 $29917401 $13318993 555

Idaho $16757951 $18138483 $1380532 924

Illinois $89823202 $230416362 $140593161 390

Indiana $28971090 $43542361 $14571271 665

Iowa $33054838 $39536464 $6481626 836

Kansas $19696209 $28596716 $8900507 689

Kentucky $23282022 $51885561 $28603539 449

Louisiana $36140052 $53731083 $17591031 673

Maine $14532362 $17197897 $2665535 845

Maryland $52125680 $74080615 $21954935 704

Massachusetts $56786732 $93728000 $36941268 606

Michigan $64647414 $102250365 $37602952 632

Minnesota $68422729 $83611446 $15188717 818

Continued on next page

12

Mississippi $28135395 $44944890 $16809495 626

Missouri $58211187 $74846702 $16635515 778

Montana $11584819 $15966542 $4381723 726

Nebraska $14256785 $15783762 $1526977 903

Nevada $41560782 $55212291 $13651509 753

New Hampshire $8894798 $13747481 $4852683 647

New Jersey $81526803 $212243893 $130717090 384

New Mexico $28373494 $46539973 $18166479 610

New York $212076811 $216315013 $4238202 980

North Carolina $97635765 $110145689 $12509924 886

North Dakota $5675354 $8705612 $3030258 652

Ohio $157058983 $207077595 $50018612 758

Oklahoma $32237217 $39635039 $7397822 813

Oregon $69327500 $84476100 $15148600 821

Pennsylvania $83300714 $152136679 $68835965 548

Rhode Island $6485178 $11966274 $5481096 542

South Carolina $31207104 $56672828 $25465724 551

South Dakota $12235719 $12233387 -$2332 1000

Tennessee $48996019 $50135354 $1139335 977

Texas $183858309 $260330851 $76472542 706

Utah $31259522 $36708181 $5448659 852

Vermont $4341722 $6760162 $2418440 642

Virginia $76555264 $96893151 $20337887 790

Washington $92610488 $98658961 $6048473 939

West Virginia $15566369 $18923489 $3357120 823

Wisconsin $96737081 $100294768 $3557687 965

Wyoming $7914035 $11556643 $3642608 685

Total $2983360762 $4221152134 $1237791374 707

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

13

State

Beginning of year net

pension liability

Assumed rate of return

(weighted average

across plans)

Assumed interest due on 2018 beginning

of year debt

2018 normal costdagger

2018 total expected

costDagger

2018 employee

contributions with interest

2018 employer

contribution benchmarksect

2018 actual employer

contributions with interest

Percent of employer

benchmark paid

Net amortization||

Alabama $15251096 775 $1181960 $954407 $2136367 $767179 $1369188 $1293504 94 -$75684

Alaska $7243003 800 $579497 $242840 $822336 $128306 $694030 $556411 80 -$137619

Arizona $27416368 774 $2122280 $1825501 $3947780 $1347511 $2600269 $2162496 83 -$437773

Arkansas $7853261 710 $557951 $534527 $1092478 $219977 $872501 $776295 89 -$96206

California $191130787 707 $13503891 $14100694 $27604585 $6762629 $20841956 $24116619 116 $3274664

Colorado $54596452 485 $2648807 $2185834 $4834641 $819995 $4014647 $1903073 47 -$2111573

Connecticut $34811035 733 $2550487 $905880 $3456367 $526637 $2929730 $2840519 97 -$89212

Delaware $1961753 631 $123883 $236947 $360830 $79153 $281677 $280407 100 -$1271

Florida $40281942 617 $2483643 $2682437 $5166080 $772653 $4393427 $3501282 80 -$892145

Georgia $22889927 749 $1714408 $1674041 $3388449 $826840 $2561609 $2857440 112 $295831

Hawaii $12950306 700 $906521 $584470 $1490992 $268354 $1222637 $876760 72 -$345878

Idaho $1506653 710 $106972 $440220 $547193 $253207 $293986 $394422 134 $100436

Illinois $136881554 696 $9523705 $3351603 $12875308 $1541872 $11333437 $8143193 72 -$3190244

Indiana $17326203 675 $1169519 $602253 $1771772 $62405 $1709366 $1989838 116 $280471

Iowa $6840464 701 $479728 $881056 $1360783 $505976 $854807 $777309 91 -$77498

Kansas $9128629 775 $707469 $552423 $1259892 $436267 $823625 $921493 112 $97868

Appendix C Net amortization details 2018In thousands

Continued on next page

14

Kentucky $42916062 457 $1962340 $1344834 $3307174 $459624 $2847550 $1885289 66 -$962261

Louisiana $18214179 767 $1396832 $754930 $2151762 $599520 $1552242 $2117818 136 $565576

Maine $2995575 688 $205946 $293786 $499732 $196064 $303668 $411397 135 $107728

Maryland $22584000 736 $1663262 $1358213 $3021475 $824117 $2197359 $2110351 96 -$87008

Massachusetts $35710159 750 $2678262 $1757434 $4435696 $1406338 $3029358 $2674071 88 -$355287

Michigan $32483291 749 $2432624 $850399 $3283024 $448739 $2834285 $3675705 130 $841420

Minnesota $37198871 570 $2118482 $2394914 $4513396 $1140576 $3372821 $1399477 41 -$1973343

Mississippi $16783124 775 $1300692 $710195 $2010887 $595085 $1415802 $1073116 76 -$342685

Missouri $15774044 758 $1196427 $1233899 $2430326 $931469 $1498857 $1582607 106 $83750

Montana $4080482 769 $313807 $257534 $571341 $211668 $359673 $362690 101 $3017

Nebraska $1474474 804 $118563 $361308 $479872 $249491 $230380 $320606 139 $90225

Nevada $13319492 750 $998962 $1138361 $2137323 $1024105 $1113217 $970167 87 -$143051

New Hampshire $4965063 725 $359849 $273264 $633113 $226092 $407022 $444277 109 $37255

New Jersey $142288433 741 $10539842 $4970779 $15510621 $2168820 $13341800 $4691558 35 -$8650242

New Mexico $16485691 641 $1056961 $879231 $1936192 $591229 $1344963 $738207 55 -$606756

New York $11468876 700 $802821 $3678776 $4481597 $361411 $4120187 $4989268 121 $869081

North Carolina $9631900 721 $694086 $2370680 $3064766 $1383612 $1681154 $2207884 131 $526731

North Dakota $2987137 706 $210885 $244878 $455763 $164401 $291362 $198577 68 -$92785

Ohio $39735633 735 $2920649 $3071713 $5992362 $3055314 $2937048 $3748626 128 $811578

Oklahoma $8548375 747 $638452 $763718 $1402170 $456570 $945600 $1326526 140 $380926

Oregon $13480000 720 $970560 $1108200 $2078760 $13046 $2065714 $1439274 70 -$626440

Continued on next page

15

Note Numbers may not be exact due to rounding

The assumed rate of return is weighted for the plans in each state by the net pension liability at the beginning of 2018

dagger The normal cost refers to the cost of benefits earned by employees in any given year Also called the service cost

Dagger The total expected cost represents the projected increase in the funding gap before taking employer and employee contributions into account It is equal to the normal cost plus the assumed interest on the unfunded liability

sect The employer contribution benchmark is the contribution level employers need to meet in order to keep pension debt from growing

|| For net amortization positive numbers mean expected progress in paying down pension debt Negative numbers mean expected growth in pension debt

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Pennsylvania $66328481 725 $4808815 $2855906 $7664721 $1470963 $6193758 $6522941 105 $329183

Rhode Island $5454061 700 $381784 $152862 $534646 $96362 $438285 $433127 99 -$5157

South Carolina $25482182 725 $1847458 $1103205 $2950663 $1046631 $1904033 $1710476 90 -$193557

South Dakota -$9075 650 -$590 $222710 $222120 $128237 $93882 $128724 137 $34842

Tennessee $1695312 731 $123939 $853550 $977488 $348831 $628657 $1141243 182 $512586

Texas $55145722 687 $3787172 $6196686 $9983858 $4210268 $5773590 $4280858 74 -$1492733

Utah $3420315 695 $237712 $642590 $880302 $37553 $842749 $1177968 140 $335219

Vermont $2283896 793 $181025 $118295 $299320 $101237 $198082 $199899 101 $1816

Virginia $21480408 700 $1503629 $1888831 $3392460 $891439 $2501020 $2554085 102 $53065

Washington $9883432 737 $728406 $1931582 $2659988 $1100150 $1559838 $2827714 181 $1267876

West Virginia $3917091 750 $293782 $281951 $575733 $164283 $411449 $678234 165 $266785

Wisconsin -$2969118 700 -$207838 $1860937 $1653099 $1006427 $646671 $1065965 165 $419294

Wyoming $2700673 671 $181154 $236862 $418016 $178956 $239060 $178228 75 -$60832

16

Appendix D Details of changes to net pension liability 2018In thousands

StateBeginning of year net

pension liability

End of year net pension

liabilityTotal changes

Net amortization benchmark

Employer + other

contributions

Net amortization

Change to reconcile

Investment experience

Benefit changes

Actuarial experience

Actuarial changes

Alabama $15251096 $15228842 -$22254 $1369188 $1293504 -$75684 -$97938 -$544500 $0 $177032 $269530

Alaska $7243003 $6929477 -$313526 $694030 $556411 -$137619 -$451145 -$17225 $0 -$433920 $0

Arizona $27416368 $25215806 -$2200562 $2600269 $2162496 -$437773 -$2638335 -$826137 -$116011 $515560 -$2211747

Arkansas $7853261 $6508389 -$1344872 $872501 $776295 -$96206 -$1441078 -$959873 $0 $34562 -$515767

California $191130787 $184852140 -$6278647 $20841956 $24116619 $3274664 -$3003983 -$3031295 $668 $2158587 -$2131943

Colorado $54596452 $31507099 -$23089353 $4014647 $1903073 -$2111573 -$25200926 $4206458 -$5980577 $889134 -$24315941

Connecticut $34811035 $35070959 $259924 $2929730 $2840519 -$89212 $170712 $74367 $510940 -$414595 $0

Delaware $1961753 $1761069 -$200684 $281677 $280407 -$1271 -$201955 -$285729 $11154 $89307 -$16687

Florida $40281942 $40704631 $422689 $4393427 $3501282 -$892145 -$469456 -$3049099 $0 $742984 $1836659

Georgia $22889927 $22930800 $40873 $2561609 $2857440 $295831 $336704 -$1164304 $72381 $1084627 $344000

Hawaii $12950306 $13318993 $368687 $1222637 $876760 -$345878 $22810 -$101944 $0 $124753 $0

Idaho $1506653 $1380532 -$126121 $293986 $394422 $100436 -$25684 -$167683 $83585 -$47697 $106111

Illinois $136881554 $140593161 $3711607 $11333437 $8143193 -$3190244 $521363 -$797304 -$374603 $731439 $961832

Indiana $17326203 $14571271 -$2754932 $1709366 $1989838 $280471 -$2474461 -$619782 $0 -$169086 -$1685593

Iowa $6840464 $6481626 -$358838 $854807 $777309 -$77498 -$436336 -$363061 -$1208 -$140228 $68161

Kansas $9128629 $8900507 -$228122 $823625 $921493 $97868 -$130254 -$83111 $0 -$47143 $0

Kentucky $42916062 $28603539 -$14312523 $2847550 $1885289 -$962261 -$15274784 -$1098415 $10513 -$19567 -$14167315

Louisiana $18214179 $17591031 -$623148 $1552242 $2117818 $565576 -$57572 -$696779 $658 -$195920 $834469

Continued on next page

17

Maine $2995575 $2665535 -$330041 $303668 $411397 $107728 -$222312 -$391240 -$106123 $35815 $239236

Maryland $22584000 $21954935 -$629065 $2197359 $2110351 -$87008 -$716073 -$185256 $5505 -$653748 $117426

Massachusetts $35710159 $36941268 $1231109 $3029358 $2674071 -$355287 $875822 -$785503 $0 $194325 $1467000

Michigan $32483291 $37602953 $5119662 $2834285 $3675705 $841420 $5961081 -$2089131 $0 -$64336 $8114548

Minnesota $37198871 $15188717 -$22010154 $3372821 $1399477 -$1973343 -$23983497 -$2573005 -$5765677 $1583 -$15646398

Mississippi $16783124 $16809495 $26371 $1415802 $1073116 -$342685 -$316314 -$354928 $0 $38614 $0

Missouri $15774044 $16635515 $861471 $1498857 $1582607 $83750 $945221 -$404892 -$8 -$7407 $1357528

Montana $4080482 $4381723 $301241 $359673 $362690 $3017 $304258 -$109601 $0 $207538 $206321

Nebraska $1474474 $1526977 $52503 $230380 $320606 $90225 $142728 $119428 $88636 -$65335 $0

Nevada $13319492 $13651509 $332017 $1113217 $970167 -$143051 $188966 -$315116 $0 $504082 $0

New Hampshire

$4965063 $4852683 -$112380 $407022 $444277 $37255 -$75125 -$108669 $0 $29109 $4435

New Jersey $142288433 $130717090 -$11571343 $13341800 $4691558 -$8650242 -$20221585 -$6169156 $0 $850491 -$14902920

New Mexico $16485691 $18166479 $1680788 $1344963 $738207 -$606756 $1074032 -$58134 $0 -$74477 $1206643

New York $11468876 $4238202 -$7230674 $4120187 $4989268 $869081 -$6361593 -$7838038 $0 $1476445 $0

North Carolina $9631900 $12509924 $2878024 $1681154 $2207884 $526731 $3404755 -$100834 $44793 $1199449 $2261347

North Dakota $2987137 $3030258 $43121 $291362 $198577 -$92785 -$49665 -$86485 $0 -$94216 $131036

Ohio $39735633 $50018612 $10282979 $2937048 $3748626 $811578 $11094557 $7711615 $0 -$307530 $3690472

Oklahoma $8548375 $7397822 -$1150553 $945600 $1326526 $380926 -$769626 -$575769 -$113763 -$105401 $25307

Oregon $13480000 $15148600 $1668600 $2065714 $1439274 -$626440 $1042160 -$1272440 $0 $74300 $2240300

Pennsylvania $66328481 $68835965 $2507484 $6193758 $6522941 $329183 $2836667 $3414973 $0 -$578306 $0

Rhode Island $5454061 $5481096 $27035 $438285 $433127 -$5157 $21877 -$50633 $0 $72627 -$116

South Carolina $25482182 $25465724 -$16458 $1904033 $1710476 -$193557 -$210015 -$136380 $0 -$73635 $0

Continued on next page

18

Sources Comprehensive annual financial reports actuarial reports and valuations or other public documents or as provided by plan

copy 2020 The Pew Charitable Trusts

Appendix E Debt driversStatesrsquo improved fiscal position in 2018 was driven by strong investment returnsmdash86 for those reporting on a fiscal year ending June 30mdashthat exceeded plan assumptions On their own investment returns lowered the cumulative funding gap by more than $10 billion although this reduction was offset by insufficient contributions Average performance through the following fiscal year ending June 30 2019 was under 710 Economic conditions in the third quarter of fiscal year 2020 point to a shortfall in meeting investment targets and an increase in unfunded liabilities of up to $500 billion nine months through the fiscal year

States cannot rely on investment income alone to chip away at their accumulated pension debt Pew has collected annual financial data on state-run pension systems since before the recession But even after a decade of economic recovery states have made limited progress in paying down pension debt In fact since 2007 the shortfall between actual contributions to state pension plans and minimum actuarial funding standards was $200 billion11

Changes to plan assumptions also decreased reported liabilities by $30 billion in 2018 however that result is driven by Colorado Kentucky Minnesota and New Jersey where improvements in funded status allowed plans to substantially increase their discount rates The remaining 46 states reported an increase in liabilities of $39 billion from assumption changes

South Dakota -$9075 -$2332 $6743 $93882 $128724 $34842 $41585 -$145567 $0 $5221 $181932

Tennessee $1695312 $1139335 -$555977 $628657 $1141243 $512586 -$43391 -$606253 $17316 -$32315 $577861

Texas $55145722 $76472542 $21326821 $5773590 $4280858 -$1492733 $19834088 -$274164 $2825 $68677 $20036750

Utah $3420315 $5448659 $2028344 $842749 $1177968 $335219 $2363563 $2338849 $0 $24714 $0

Vermont $2283896 $2418440 $134544 $198082 $199899 $1816 $136361 $12217 $194 $156907 -$32957

Virginia $21480408 $20337887 -$1142521 $2501020 $2554085 $53065 -$1089456 -$240348 $10811 -$859919 $0

Washington $9883432 $6048473 -$3834959 $1559838 $2827714 $1267876 -$2567083 -$1546224 $175100 -$118086 -$1077873

West Virginia $3917091 $3357120 -$559971 $411449 $678234 $266785 -$293186 -$279644 $0 -$14504 $962

Wisconsin -$2969118 $3557687 $6526805 $646671 $1065965 $419294 $6946099 $11552920 $0 -$4968302 $361481

Wyoming $2700673 $3642608 $941935 $239060 $178228 -$60832 $881102 $882867 $0 -$67752 $65987

Total $1276007674 $1237791374 -$38216300 $126118030 $114658013 -$11460017 -$49676317 -$10189958 -$11422892 $1934455 -$29997922

19

Change in Pension DebtStrong investment performance and changes in assumptions reduced reported pension debt by $10 billion and $30 billion respectively

Source Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Appendix F Net amortization benchmarkThe benchmark is calculated by taking the sum of service cost (the actuarial value of the benefits earned in 2018 also called normal cost) and interest on the net pension liability at the beginning of the year (each pension planrsquos total pension liability and the net pension liability both grow annually at the planrsquos assumed rate of return) and subtracting employee contributions Employer and employee contributions are adjusted to reflect expected interest After subtracting the $43 billion contributed by workers nationwide in 2018 (including interest) employers would have needed to contribute $126 billion to meet the net amortization benchmark to keep pension debt from growing To actually make progress on closing the funding gap states would have to exceed the contribution benchmark on a consistent basis

In b

illio

ns

$0

$200

$400

$600

$800

$1000

$1200

$1400

2018 netpension liability

Other factorsNetamortization

Changes inassumptions

Investmentgains

2017 netpension liability

$1276 -$10 -$30 -$9$11 $1238

For further information please visit pewtrustsorgpensions

Contact Sarah Jones communications officer Email sjonespewtrustsorg Project website pewtrustsorgpensions

The Pew Charitable Trusts is driven by the power of knowledge to solve todayrsquos most challenging problems Pew applies a rigorous analytical approach to improve public policy inform the public and invigorate civic life

Endnotes1 See Appendix F for more information on the net amortization benchmark

2 For example the US experienced annual gross domestic product (GDP) growth of more than 55 from 1988 through 2007 while the Congressional Budget Office now projects only 4 annual growth for the next decade See Congressional Budget Office ldquoThe Budget and Economic Outlook 2019 to 2029rdquo (2019) httpswwwcbogovsstemfiles2019-0354918-Outlook-3pdf

3 See SEBAC 2017 Agreement httpaftctorgsitesaftctorgfilessebac_2017_ta_signedpdf for details on Connecticut State Employees Retirement System (SERS) pension reforms

4 See Fitch Ratings ldquoConnecticut Teacher Pension Changes Costly but Lower Fiscal Risksrdquo Feb 28 2019 httpswwwfitchratingscomsitepr10064878

5 National Association of State Retirement Administrators ldquoNASRA Issue Brief Public Pension Plan Investment Return Assumptionsrdquo (updated April 2014) httpwwwnasraorgfilesIssue20BriefsNASRAInvReturnAssumptBriefpdf

6 Low return scenario assumes a 5 return

7 K Brainard and A Brown ldquoIn-Depth Risk Sharing in Public Retirement Plansrdquo (National Association of State Retirement Administrators 2018)

8 GASB Statement 67 on Financial Reporting for Pension Plans does also require an adjustment to the discount rate assumptionsmdashresulting in a higher reported pension liabilitymdashif current contribution policies are deemed insufficient However as of 2018 reporting only nine of the largest 100 plans across the 50 states are required to make this adjustment down from 15 in 2017

9 The Pew Charitable Trusts ldquoFoundation for Public Pensions Risk Reportingrdquo (2018) httpswwwhksharvardedusitesdefaultfilescentersmrcbgprogramsFoundation20for20Pensions20Risk20Reporting20(Strawman)pdf

10 Wilshire Trust Universe Comparison Service and Wilshire TUCS are service marks of Wilshire Associates Inc (ldquoWilshirerdquo) and have been licensed for use by The Pew Charitable Trusts All content of Wilshire TUCS is copyright 2019 Wilshire Associates Inc all rights reserved

11 Accounting standards changed in 2014 From 2007 to 2013 the shortfall is calculated between the actuarial recommended contribution and actual employer contributions From 2014 to 2018 the shortfall represents the gap between the net amortization benchmark and employer contributions

8

Stress testing is emerging as an effective risk management toolMany states may not be prepared for how an economic downturn could affect the costs of their retirement systems The 2014 changes to GASB reporting requirements included a requirement that plans report sensitivity analysis related to investment returns But the requirement is limited to reporting liabilities within a narrow range of alternative investment returns of +- 1 at a single point in time Furthermore it does not require forward-looking projections that account for wider swings in investment returns or the risk of contributions falling short of the levels required by a statersquos own policies8

The experience of the past 20 years shows that states need to consider both of these risk factors more fully To better understand the risks facing state pension plans and ultimately state budgets policymakers are turning to stress testingmdashand the adoption of new actuarial standards that promote its usemdashto assess and manage investment and contribution risk

Stress testing involves the simulation of a range of economic scenarios and investment returns to determine their potential impact on future pension costs and liabilities Building on existing actuarial projections comprehensive stress testing can be a powerful tool for policymakers to understand how pension balance sheets and government budgets will fare during an economic downturn or over a period of lower-than-expected growth It also allows states to evaluate the impact of reform proposals or policy changes

Fourteen states have enacted or are considering adopting stress testing requirements And the results of stress test analyses in Colorado Connecticut and Hawaii demonstrate that this is not an academic exercise

In Colorado a 2015 stress test analysis concluded that the state faced a 1 in 4 chance that the assets in the Public Employeesrsquo Retirement Associationrsquos main fund would be depleted within 25 to 30 years The finding led to reforms that were foundmdashthrough further stress testingmdashto mitigate the risk of insolvency In Connecticut a stress test analysis in 2018 found that although reforms to the State Employees Retirement System had improved the systemrsquos fiscal health additional changes to the teachersrsquo system were needed to avoid substantial cost increases As a result policymakers made reforms to address these risks as well And in Hawaiimdashwhich has issued annual stress test reports since 2017mdashpolicymakers have used the analysis to demonstrate that recent reforms to the statersquos contribution policy have improved the planrsquos fiscal position

We expect the trend of adopting public risk reporting and stress testing to continue as state retirement systems implement the Actuarial Standard of Practice No 51 adopted by the Actuarial Standards Board in September 2017 The new standards require plan actuaries to regularly conduct an assessment of investment contribution and other risks

9

Figure 5

States That Have Enacted or Are Considering Adopting Stress Testing RequirementsTen states require stress testing or risk reporting eight have adopted it since 2017

Note Of the states that have adopted stress testing requirements by statute at least four (Washington California Virginia and Hawaii) have produced at least two stress testing reports as of January 2020 Map is as of April 2020

Source State public documents or as provided by state officials

copy 2020 The Pew Charitable Trusts

These actuarial studies can provide a comprehensive assessment of a range of risk factors including investment contribution and longevity risk But the reports are designed primarily for plan fiduciaries as opposed to a broader set of stakeholders Pewrsquos ldquoFoundation for Public Pensions Risk Reportingrdquo released in November 2018 in collaboration with the Harvard Kennedy Schoolrsquos Mossavar-Rahmani Center for Business and Government was designed to leverage these data in a standard form that is focused on impacts to taxpayers and government budget officials9 And with the impact of COVID-19 on financial markets and pension balance sheets states are already applying Pew and the centerrsquos principles of risk reporting

For example in Montana a stress test report focusing on an asset shock scenario with a significant loss on plan investments similar to the recent downturn beginning in March 2020 was used to assess the sufficiency of the statersquos funding policy entering a recession The results suggest that policymakers will face difficult decisions in terms of strengthening pension funding while revenue is projected to decline Although these decisions are challenging the stress test has provided policymakers with a clear understanding of the goals for pension reform

Risk reporting for public pensions should be accessible to all stakeholders and designed to inform planning and decision-making and to assist government officials and others as they assess the potential impact of the next recession It can be used to quantify the potential cost of investment risk on government budgets evaluate the

WY

AZ

CA

ID

UT

MT

NVOR

WA

NM

OK

TX

AR

CO

IA

KS

LA

MN

MONE

ND

SD

AK HI

WI

AL

IL IN

KY

MS

TN

NY

NC

OH

PA

WV

FL

GA

ME

MI

SC

VA

MA

CT

VT NH

RI

NJ

DEMD

Stress testing requirements Considering

10

impact of contribution risk on pension system financial position and provide a framework to evaluate policy proposals to strengthen state fiscal health

ConclusionAlthough many state and local pension plans are still vulnerable to market volatility and recession others have weathered past economic downturns well In the near-term state and local officials will continue to focus on the COVID-19 pandemic while navigating a host of budget challenges including declining revenue and an increased need for safety net programs As decision-makers confront these challenges a careful evaluation of successful systemsrsquo policies reveals common practices that can serve as a toolkit for policymakers to strengthen their statesrsquo pension plans over the long-term All states should consider

bull Funding at levels that target debt reduction Plans that consistently make annual payments sufficient to pay for current benefits as well as reduce a portion of pension debt are more likely to recover quickly from economic downturns and better weather recessions

bull Decreasing assumed returns and discount rates Forecasts of lower-than-historical economic growth and bond yields over the next 10 to 20 years drive the growing consensus that pension funds should plan for lower long-term investment returns than those of the past

bull Ensuring cost predictability Plans with cost-sharing features were the ones most likely to recover quickly from the downturns of the first decade of the 2000s and to maintain a strong financial position throughout the recovery

bull Employing stress testing and public risk reporting States that regularly assess whether current pension policies are sustainable throughout the economic cycle and over time have the information necessary to ensure that pension plans will be resilient during downturns

There is no one-size-fits-all solution when it comes to plan structure and design However the practices of well-funded plans of all types indicate that these four policy prescriptions can help achieve and maintain fiscal sustainability for pension balance sheets and sponsoring government balance sheets as well as ensure that benefits will be paid to the workers and retirees who depend on them

Appendix A MethodologyAll figures presented are as reported in public documents or as provided by plan officials The main data sources used were the comprehensive annual financial reports produced by each state and pension plan actuarial reports and valuations and other state documents that disclose financial details about public employment retirement systems Pew collected data for more than 230 pension plans

Pew shared the collected data with plan officials to give them an opportunity to review them and to provide additional information This feedback was incorporated into the data presented in this brief

Because of lags in valuation for many state pension plans only partial 2019 data were available and fiscal 2018 is the most recent year for which comprehensive data were available for all 50 states Data on Tennessee aggregate political subdivisions were not available for fiscal 2018 so data were rolled forward from 2017 Data on a subset of California local governments participating in the California Public Employeesrsquo Retirement System were not available in aggregate and were not included in our data

Each state retirement system uses different key assumptions and methods in presenting its financial information Pew made no adjustments or changes to the presentation of aggregate state asset or liability data for this brief

11

Assumptions underlying each statersquos funding data include the assumed rate of return on investments and estimates of employeesrsquo life spans retirement ages salary growth marriage rates retention rates and other demographic characteristics

Appendix B State data 2018In thousands

State Assets (plan net position) Liabilities (total pension liability)

Pension debt (net pension liability) Funded ratio

Alabama $38973099 $54201941 $15228842 719

Alaska $14995615 $21925093 $6929477 684

Arizona $47908905 $73124711 $25215806 655

Arkansas $28149299 $34657689 $6508389 812

California $455619154 $640471294 $184852140 711

Colorado $44906648 $76413747 $31507099 588

Connecticut $30697189 $65768148 $35070959 467

Delaware $10064363 $11825432 $1761069 851

Florida $161429344 $202133975 $40704630 799

Georgia $92155238 $115086038 $22930800 801

Hawaii $16598408 $29917401 $13318993 555

Idaho $16757951 $18138483 $1380532 924

Illinois $89823202 $230416362 $140593161 390

Indiana $28971090 $43542361 $14571271 665

Iowa $33054838 $39536464 $6481626 836

Kansas $19696209 $28596716 $8900507 689

Kentucky $23282022 $51885561 $28603539 449

Louisiana $36140052 $53731083 $17591031 673

Maine $14532362 $17197897 $2665535 845

Maryland $52125680 $74080615 $21954935 704

Massachusetts $56786732 $93728000 $36941268 606

Michigan $64647414 $102250365 $37602952 632

Minnesota $68422729 $83611446 $15188717 818

Continued on next page

12

Mississippi $28135395 $44944890 $16809495 626

Missouri $58211187 $74846702 $16635515 778

Montana $11584819 $15966542 $4381723 726

Nebraska $14256785 $15783762 $1526977 903

Nevada $41560782 $55212291 $13651509 753

New Hampshire $8894798 $13747481 $4852683 647

New Jersey $81526803 $212243893 $130717090 384

New Mexico $28373494 $46539973 $18166479 610

New York $212076811 $216315013 $4238202 980

North Carolina $97635765 $110145689 $12509924 886

North Dakota $5675354 $8705612 $3030258 652

Ohio $157058983 $207077595 $50018612 758

Oklahoma $32237217 $39635039 $7397822 813

Oregon $69327500 $84476100 $15148600 821

Pennsylvania $83300714 $152136679 $68835965 548

Rhode Island $6485178 $11966274 $5481096 542

South Carolina $31207104 $56672828 $25465724 551

South Dakota $12235719 $12233387 -$2332 1000

Tennessee $48996019 $50135354 $1139335 977

Texas $183858309 $260330851 $76472542 706

Utah $31259522 $36708181 $5448659 852

Vermont $4341722 $6760162 $2418440 642

Virginia $76555264 $96893151 $20337887 790

Washington $92610488 $98658961 $6048473 939

West Virginia $15566369 $18923489 $3357120 823

Wisconsin $96737081 $100294768 $3557687 965

Wyoming $7914035 $11556643 $3642608 685

Total $2983360762 $4221152134 $1237791374 707

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

13

State

Beginning of year net

pension liability

Assumed rate of return

(weighted average

across plans)

Assumed interest due on 2018 beginning

of year debt

2018 normal costdagger

2018 total expected

costDagger

2018 employee

contributions with interest

2018 employer

contribution benchmarksect

2018 actual employer

contributions with interest

Percent of employer

benchmark paid

Net amortization||

Alabama $15251096 775 $1181960 $954407 $2136367 $767179 $1369188 $1293504 94 -$75684

Alaska $7243003 800 $579497 $242840 $822336 $128306 $694030 $556411 80 -$137619

Arizona $27416368 774 $2122280 $1825501 $3947780 $1347511 $2600269 $2162496 83 -$437773

Arkansas $7853261 710 $557951 $534527 $1092478 $219977 $872501 $776295 89 -$96206

California $191130787 707 $13503891 $14100694 $27604585 $6762629 $20841956 $24116619 116 $3274664

Colorado $54596452 485 $2648807 $2185834 $4834641 $819995 $4014647 $1903073 47 -$2111573

Connecticut $34811035 733 $2550487 $905880 $3456367 $526637 $2929730 $2840519 97 -$89212

Delaware $1961753 631 $123883 $236947 $360830 $79153 $281677 $280407 100 -$1271

Florida $40281942 617 $2483643 $2682437 $5166080 $772653 $4393427 $3501282 80 -$892145

Georgia $22889927 749 $1714408 $1674041 $3388449 $826840 $2561609 $2857440 112 $295831

Hawaii $12950306 700 $906521 $584470 $1490992 $268354 $1222637 $876760 72 -$345878

Idaho $1506653 710 $106972 $440220 $547193 $253207 $293986 $394422 134 $100436

Illinois $136881554 696 $9523705 $3351603 $12875308 $1541872 $11333437 $8143193 72 -$3190244

Indiana $17326203 675 $1169519 $602253 $1771772 $62405 $1709366 $1989838 116 $280471

Iowa $6840464 701 $479728 $881056 $1360783 $505976 $854807 $777309 91 -$77498

Kansas $9128629 775 $707469 $552423 $1259892 $436267 $823625 $921493 112 $97868

Appendix C Net amortization details 2018In thousands

Continued on next page

14

Kentucky $42916062 457 $1962340 $1344834 $3307174 $459624 $2847550 $1885289 66 -$962261

Louisiana $18214179 767 $1396832 $754930 $2151762 $599520 $1552242 $2117818 136 $565576

Maine $2995575 688 $205946 $293786 $499732 $196064 $303668 $411397 135 $107728

Maryland $22584000 736 $1663262 $1358213 $3021475 $824117 $2197359 $2110351 96 -$87008

Massachusetts $35710159 750 $2678262 $1757434 $4435696 $1406338 $3029358 $2674071 88 -$355287

Michigan $32483291 749 $2432624 $850399 $3283024 $448739 $2834285 $3675705 130 $841420

Minnesota $37198871 570 $2118482 $2394914 $4513396 $1140576 $3372821 $1399477 41 -$1973343

Mississippi $16783124 775 $1300692 $710195 $2010887 $595085 $1415802 $1073116 76 -$342685

Missouri $15774044 758 $1196427 $1233899 $2430326 $931469 $1498857 $1582607 106 $83750

Montana $4080482 769 $313807 $257534 $571341 $211668 $359673 $362690 101 $3017

Nebraska $1474474 804 $118563 $361308 $479872 $249491 $230380 $320606 139 $90225

Nevada $13319492 750 $998962 $1138361 $2137323 $1024105 $1113217 $970167 87 -$143051

New Hampshire $4965063 725 $359849 $273264 $633113 $226092 $407022 $444277 109 $37255

New Jersey $142288433 741 $10539842 $4970779 $15510621 $2168820 $13341800 $4691558 35 -$8650242

New Mexico $16485691 641 $1056961 $879231 $1936192 $591229 $1344963 $738207 55 -$606756

New York $11468876 700 $802821 $3678776 $4481597 $361411 $4120187 $4989268 121 $869081

North Carolina $9631900 721 $694086 $2370680 $3064766 $1383612 $1681154 $2207884 131 $526731

North Dakota $2987137 706 $210885 $244878 $455763 $164401 $291362 $198577 68 -$92785

Ohio $39735633 735 $2920649 $3071713 $5992362 $3055314 $2937048 $3748626 128 $811578

Oklahoma $8548375 747 $638452 $763718 $1402170 $456570 $945600 $1326526 140 $380926

Oregon $13480000 720 $970560 $1108200 $2078760 $13046 $2065714 $1439274 70 -$626440

Continued on next page

15

Note Numbers may not be exact due to rounding

The assumed rate of return is weighted for the plans in each state by the net pension liability at the beginning of 2018

dagger The normal cost refers to the cost of benefits earned by employees in any given year Also called the service cost

Dagger The total expected cost represents the projected increase in the funding gap before taking employer and employee contributions into account It is equal to the normal cost plus the assumed interest on the unfunded liability

sect The employer contribution benchmark is the contribution level employers need to meet in order to keep pension debt from growing

|| For net amortization positive numbers mean expected progress in paying down pension debt Negative numbers mean expected growth in pension debt

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Pennsylvania $66328481 725 $4808815 $2855906 $7664721 $1470963 $6193758 $6522941 105 $329183

Rhode Island $5454061 700 $381784 $152862 $534646 $96362 $438285 $433127 99 -$5157

South Carolina $25482182 725 $1847458 $1103205 $2950663 $1046631 $1904033 $1710476 90 -$193557

South Dakota -$9075 650 -$590 $222710 $222120 $128237 $93882 $128724 137 $34842

Tennessee $1695312 731 $123939 $853550 $977488 $348831 $628657 $1141243 182 $512586

Texas $55145722 687 $3787172 $6196686 $9983858 $4210268 $5773590 $4280858 74 -$1492733

Utah $3420315 695 $237712 $642590 $880302 $37553 $842749 $1177968 140 $335219

Vermont $2283896 793 $181025 $118295 $299320 $101237 $198082 $199899 101 $1816

Virginia $21480408 700 $1503629 $1888831 $3392460 $891439 $2501020 $2554085 102 $53065

Washington $9883432 737 $728406 $1931582 $2659988 $1100150 $1559838 $2827714 181 $1267876

West Virginia $3917091 750 $293782 $281951 $575733 $164283 $411449 $678234 165 $266785

Wisconsin -$2969118 700 -$207838 $1860937 $1653099 $1006427 $646671 $1065965 165 $419294

Wyoming $2700673 671 $181154 $236862 $418016 $178956 $239060 $178228 75 -$60832

16

Appendix D Details of changes to net pension liability 2018In thousands

StateBeginning of year net

pension liability

End of year net pension

liabilityTotal changes

Net amortization benchmark

Employer + other

contributions

Net amortization

Change to reconcile

Investment experience

Benefit changes

Actuarial experience

Actuarial changes

Alabama $15251096 $15228842 -$22254 $1369188 $1293504 -$75684 -$97938 -$544500 $0 $177032 $269530

Alaska $7243003 $6929477 -$313526 $694030 $556411 -$137619 -$451145 -$17225 $0 -$433920 $0

Arizona $27416368 $25215806 -$2200562 $2600269 $2162496 -$437773 -$2638335 -$826137 -$116011 $515560 -$2211747

Arkansas $7853261 $6508389 -$1344872 $872501 $776295 -$96206 -$1441078 -$959873 $0 $34562 -$515767

California $191130787 $184852140 -$6278647 $20841956 $24116619 $3274664 -$3003983 -$3031295 $668 $2158587 -$2131943

Colorado $54596452 $31507099 -$23089353 $4014647 $1903073 -$2111573 -$25200926 $4206458 -$5980577 $889134 -$24315941

Connecticut $34811035 $35070959 $259924 $2929730 $2840519 -$89212 $170712 $74367 $510940 -$414595 $0

Delaware $1961753 $1761069 -$200684 $281677 $280407 -$1271 -$201955 -$285729 $11154 $89307 -$16687

Florida $40281942 $40704631 $422689 $4393427 $3501282 -$892145 -$469456 -$3049099 $0 $742984 $1836659

Georgia $22889927 $22930800 $40873 $2561609 $2857440 $295831 $336704 -$1164304 $72381 $1084627 $344000

Hawaii $12950306 $13318993 $368687 $1222637 $876760 -$345878 $22810 -$101944 $0 $124753 $0

Idaho $1506653 $1380532 -$126121 $293986 $394422 $100436 -$25684 -$167683 $83585 -$47697 $106111

Illinois $136881554 $140593161 $3711607 $11333437 $8143193 -$3190244 $521363 -$797304 -$374603 $731439 $961832

Indiana $17326203 $14571271 -$2754932 $1709366 $1989838 $280471 -$2474461 -$619782 $0 -$169086 -$1685593

Iowa $6840464 $6481626 -$358838 $854807 $777309 -$77498 -$436336 -$363061 -$1208 -$140228 $68161

Kansas $9128629 $8900507 -$228122 $823625 $921493 $97868 -$130254 -$83111 $0 -$47143 $0

Kentucky $42916062 $28603539 -$14312523 $2847550 $1885289 -$962261 -$15274784 -$1098415 $10513 -$19567 -$14167315

Louisiana $18214179 $17591031 -$623148 $1552242 $2117818 $565576 -$57572 -$696779 $658 -$195920 $834469

Continued on next page

17

Maine $2995575 $2665535 -$330041 $303668 $411397 $107728 -$222312 -$391240 -$106123 $35815 $239236

Maryland $22584000 $21954935 -$629065 $2197359 $2110351 -$87008 -$716073 -$185256 $5505 -$653748 $117426

Massachusetts $35710159 $36941268 $1231109 $3029358 $2674071 -$355287 $875822 -$785503 $0 $194325 $1467000

Michigan $32483291 $37602953 $5119662 $2834285 $3675705 $841420 $5961081 -$2089131 $0 -$64336 $8114548

Minnesota $37198871 $15188717 -$22010154 $3372821 $1399477 -$1973343 -$23983497 -$2573005 -$5765677 $1583 -$15646398

Mississippi $16783124 $16809495 $26371 $1415802 $1073116 -$342685 -$316314 -$354928 $0 $38614 $0

Missouri $15774044 $16635515 $861471 $1498857 $1582607 $83750 $945221 -$404892 -$8 -$7407 $1357528

Montana $4080482 $4381723 $301241 $359673 $362690 $3017 $304258 -$109601 $0 $207538 $206321

Nebraska $1474474 $1526977 $52503 $230380 $320606 $90225 $142728 $119428 $88636 -$65335 $0

Nevada $13319492 $13651509 $332017 $1113217 $970167 -$143051 $188966 -$315116 $0 $504082 $0

New Hampshire

$4965063 $4852683 -$112380 $407022 $444277 $37255 -$75125 -$108669 $0 $29109 $4435

New Jersey $142288433 $130717090 -$11571343 $13341800 $4691558 -$8650242 -$20221585 -$6169156 $0 $850491 -$14902920

New Mexico $16485691 $18166479 $1680788 $1344963 $738207 -$606756 $1074032 -$58134 $0 -$74477 $1206643

New York $11468876 $4238202 -$7230674 $4120187 $4989268 $869081 -$6361593 -$7838038 $0 $1476445 $0

North Carolina $9631900 $12509924 $2878024 $1681154 $2207884 $526731 $3404755 -$100834 $44793 $1199449 $2261347

North Dakota $2987137 $3030258 $43121 $291362 $198577 -$92785 -$49665 -$86485 $0 -$94216 $131036

Ohio $39735633 $50018612 $10282979 $2937048 $3748626 $811578 $11094557 $7711615 $0 -$307530 $3690472

Oklahoma $8548375 $7397822 -$1150553 $945600 $1326526 $380926 -$769626 -$575769 -$113763 -$105401 $25307

Oregon $13480000 $15148600 $1668600 $2065714 $1439274 -$626440 $1042160 -$1272440 $0 $74300 $2240300

Pennsylvania $66328481 $68835965 $2507484 $6193758 $6522941 $329183 $2836667 $3414973 $0 -$578306 $0

Rhode Island $5454061 $5481096 $27035 $438285 $433127 -$5157 $21877 -$50633 $0 $72627 -$116

South Carolina $25482182 $25465724 -$16458 $1904033 $1710476 -$193557 -$210015 -$136380 $0 -$73635 $0

Continued on next page

18

Sources Comprehensive annual financial reports actuarial reports and valuations or other public documents or as provided by plan

copy 2020 The Pew Charitable Trusts

Appendix E Debt driversStatesrsquo improved fiscal position in 2018 was driven by strong investment returnsmdash86 for those reporting on a fiscal year ending June 30mdashthat exceeded plan assumptions On their own investment returns lowered the cumulative funding gap by more than $10 billion although this reduction was offset by insufficient contributions Average performance through the following fiscal year ending June 30 2019 was under 710 Economic conditions in the third quarter of fiscal year 2020 point to a shortfall in meeting investment targets and an increase in unfunded liabilities of up to $500 billion nine months through the fiscal year

States cannot rely on investment income alone to chip away at their accumulated pension debt Pew has collected annual financial data on state-run pension systems since before the recession But even after a decade of economic recovery states have made limited progress in paying down pension debt In fact since 2007 the shortfall between actual contributions to state pension plans and minimum actuarial funding standards was $200 billion11

Changes to plan assumptions also decreased reported liabilities by $30 billion in 2018 however that result is driven by Colorado Kentucky Minnesota and New Jersey where improvements in funded status allowed plans to substantially increase their discount rates The remaining 46 states reported an increase in liabilities of $39 billion from assumption changes

South Dakota -$9075 -$2332 $6743 $93882 $128724 $34842 $41585 -$145567 $0 $5221 $181932

Tennessee $1695312 $1139335 -$555977 $628657 $1141243 $512586 -$43391 -$606253 $17316 -$32315 $577861

Texas $55145722 $76472542 $21326821 $5773590 $4280858 -$1492733 $19834088 -$274164 $2825 $68677 $20036750

Utah $3420315 $5448659 $2028344 $842749 $1177968 $335219 $2363563 $2338849 $0 $24714 $0

Vermont $2283896 $2418440 $134544 $198082 $199899 $1816 $136361 $12217 $194 $156907 -$32957

Virginia $21480408 $20337887 -$1142521 $2501020 $2554085 $53065 -$1089456 -$240348 $10811 -$859919 $0

Washington $9883432 $6048473 -$3834959 $1559838 $2827714 $1267876 -$2567083 -$1546224 $175100 -$118086 -$1077873

West Virginia $3917091 $3357120 -$559971 $411449 $678234 $266785 -$293186 -$279644 $0 -$14504 $962

Wisconsin -$2969118 $3557687 $6526805 $646671 $1065965 $419294 $6946099 $11552920 $0 -$4968302 $361481

Wyoming $2700673 $3642608 $941935 $239060 $178228 -$60832 $881102 $882867 $0 -$67752 $65987

Total $1276007674 $1237791374 -$38216300 $126118030 $114658013 -$11460017 -$49676317 -$10189958 -$11422892 $1934455 -$29997922

19

Change in Pension DebtStrong investment performance and changes in assumptions reduced reported pension debt by $10 billion and $30 billion respectively

Source Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Appendix F Net amortization benchmarkThe benchmark is calculated by taking the sum of service cost (the actuarial value of the benefits earned in 2018 also called normal cost) and interest on the net pension liability at the beginning of the year (each pension planrsquos total pension liability and the net pension liability both grow annually at the planrsquos assumed rate of return) and subtracting employee contributions Employer and employee contributions are adjusted to reflect expected interest After subtracting the $43 billion contributed by workers nationwide in 2018 (including interest) employers would have needed to contribute $126 billion to meet the net amortization benchmark to keep pension debt from growing To actually make progress on closing the funding gap states would have to exceed the contribution benchmark on a consistent basis

In b

illio

ns

$0

$200

$400

$600

$800

$1000

$1200

$1400

2018 netpension liability

Other factorsNetamortization

Changes inassumptions

Investmentgains

2017 netpension liability

$1276 -$10 -$30 -$9$11 $1238

For further information please visit pewtrustsorgpensions

Contact Sarah Jones communications officer Email sjonespewtrustsorg Project website pewtrustsorgpensions

The Pew Charitable Trusts is driven by the power of knowledge to solve todayrsquos most challenging problems Pew applies a rigorous analytical approach to improve public policy inform the public and invigorate civic life

Endnotes1 See Appendix F for more information on the net amortization benchmark

2 For example the US experienced annual gross domestic product (GDP) growth of more than 55 from 1988 through 2007 while the Congressional Budget Office now projects only 4 annual growth for the next decade See Congressional Budget Office ldquoThe Budget and Economic Outlook 2019 to 2029rdquo (2019) httpswwwcbogovsstemfiles2019-0354918-Outlook-3pdf

3 See SEBAC 2017 Agreement httpaftctorgsitesaftctorgfilessebac_2017_ta_signedpdf for details on Connecticut State Employees Retirement System (SERS) pension reforms

4 See Fitch Ratings ldquoConnecticut Teacher Pension Changes Costly but Lower Fiscal Risksrdquo Feb 28 2019 httpswwwfitchratingscomsitepr10064878

5 National Association of State Retirement Administrators ldquoNASRA Issue Brief Public Pension Plan Investment Return Assumptionsrdquo (updated April 2014) httpwwwnasraorgfilesIssue20BriefsNASRAInvReturnAssumptBriefpdf

6 Low return scenario assumes a 5 return

7 K Brainard and A Brown ldquoIn-Depth Risk Sharing in Public Retirement Plansrdquo (National Association of State Retirement Administrators 2018)

8 GASB Statement 67 on Financial Reporting for Pension Plans does also require an adjustment to the discount rate assumptionsmdashresulting in a higher reported pension liabilitymdashif current contribution policies are deemed insufficient However as of 2018 reporting only nine of the largest 100 plans across the 50 states are required to make this adjustment down from 15 in 2017

9 The Pew Charitable Trusts ldquoFoundation for Public Pensions Risk Reportingrdquo (2018) httpswwwhksharvardedusitesdefaultfilescentersmrcbgprogramsFoundation20for20Pensions20Risk20Reporting20(Strawman)pdf

10 Wilshire Trust Universe Comparison Service and Wilshire TUCS are service marks of Wilshire Associates Inc (ldquoWilshirerdquo) and have been licensed for use by The Pew Charitable Trusts All content of Wilshire TUCS is copyright 2019 Wilshire Associates Inc all rights reserved

11 Accounting standards changed in 2014 From 2007 to 2013 the shortfall is calculated between the actuarial recommended contribution and actual employer contributions From 2014 to 2018 the shortfall represents the gap between the net amortization benchmark and employer contributions

9

Figure 5

States That Have Enacted or Are Considering Adopting Stress Testing RequirementsTen states require stress testing or risk reporting eight have adopted it since 2017

Note Of the states that have adopted stress testing requirements by statute at least four (Washington California Virginia and Hawaii) have produced at least two stress testing reports as of January 2020 Map is as of April 2020

Source State public documents or as provided by state officials

copy 2020 The Pew Charitable Trusts

These actuarial studies can provide a comprehensive assessment of a range of risk factors including investment contribution and longevity risk But the reports are designed primarily for plan fiduciaries as opposed to a broader set of stakeholders Pewrsquos ldquoFoundation for Public Pensions Risk Reportingrdquo released in November 2018 in collaboration with the Harvard Kennedy Schoolrsquos Mossavar-Rahmani Center for Business and Government was designed to leverage these data in a standard form that is focused on impacts to taxpayers and government budget officials9 And with the impact of COVID-19 on financial markets and pension balance sheets states are already applying Pew and the centerrsquos principles of risk reporting

For example in Montana a stress test report focusing on an asset shock scenario with a significant loss on plan investments similar to the recent downturn beginning in March 2020 was used to assess the sufficiency of the statersquos funding policy entering a recession The results suggest that policymakers will face difficult decisions in terms of strengthening pension funding while revenue is projected to decline Although these decisions are challenging the stress test has provided policymakers with a clear understanding of the goals for pension reform

Risk reporting for public pensions should be accessible to all stakeholders and designed to inform planning and decision-making and to assist government officials and others as they assess the potential impact of the next recession It can be used to quantify the potential cost of investment risk on government budgets evaluate the

WY

AZ

CA

ID

UT

MT

NVOR

WA

NM

OK

TX

AR

CO

IA

KS

LA

MN

MONE

ND

SD

AK HI

WI

AL

IL IN

KY

MS

TN

NY

NC

OH

PA

WV

FL

GA

ME

MI

SC

VA

MA

CT

VT NH

RI

NJ

DEMD

Stress testing requirements Considering

10

impact of contribution risk on pension system financial position and provide a framework to evaluate policy proposals to strengthen state fiscal health

ConclusionAlthough many state and local pension plans are still vulnerable to market volatility and recession others have weathered past economic downturns well In the near-term state and local officials will continue to focus on the COVID-19 pandemic while navigating a host of budget challenges including declining revenue and an increased need for safety net programs As decision-makers confront these challenges a careful evaluation of successful systemsrsquo policies reveals common practices that can serve as a toolkit for policymakers to strengthen their statesrsquo pension plans over the long-term All states should consider

bull Funding at levels that target debt reduction Plans that consistently make annual payments sufficient to pay for current benefits as well as reduce a portion of pension debt are more likely to recover quickly from economic downturns and better weather recessions

bull Decreasing assumed returns and discount rates Forecasts of lower-than-historical economic growth and bond yields over the next 10 to 20 years drive the growing consensus that pension funds should plan for lower long-term investment returns than those of the past

bull Ensuring cost predictability Plans with cost-sharing features were the ones most likely to recover quickly from the downturns of the first decade of the 2000s and to maintain a strong financial position throughout the recovery

bull Employing stress testing and public risk reporting States that regularly assess whether current pension policies are sustainable throughout the economic cycle and over time have the information necessary to ensure that pension plans will be resilient during downturns

There is no one-size-fits-all solution when it comes to plan structure and design However the practices of well-funded plans of all types indicate that these four policy prescriptions can help achieve and maintain fiscal sustainability for pension balance sheets and sponsoring government balance sheets as well as ensure that benefits will be paid to the workers and retirees who depend on them

Appendix A MethodologyAll figures presented are as reported in public documents or as provided by plan officials The main data sources used were the comprehensive annual financial reports produced by each state and pension plan actuarial reports and valuations and other state documents that disclose financial details about public employment retirement systems Pew collected data for more than 230 pension plans

Pew shared the collected data with plan officials to give them an opportunity to review them and to provide additional information This feedback was incorporated into the data presented in this brief

Because of lags in valuation for many state pension plans only partial 2019 data were available and fiscal 2018 is the most recent year for which comprehensive data were available for all 50 states Data on Tennessee aggregate political subdivisions were not available for fiscal 2018 so data were rolled forward from 2017 Data on a subset of California local governments participating in the California Public Employeesrsquo Retirement System were not available in aggregate and were not included in our data

Each state retirement system uses different key assumptions and methods in presenting its financial information Pew made no adjustments or changes to the presentation of aggregate state asset or liability data for this brief

11

Assumptions underlying each statersquos funding data include the assumed rate of return on investments and estimates of employeesrsquo life spans retirement ages salary growth marriage rates retention rates and other demographic characteristics

Appendix B State data 2018In thousands

State Assets (plan net position) Liabilities (total pension liability)

Pension debt (net pension liability) Funded ratio

Alabama $38973099 $54201941 $15228842 719

Alaska $14995615 $21925093 $6929477 684

Arizona $47908905 $73124711 $25215806 655

Arkansas $28149299 $34657689 $6508389 812

California $455619154 $640471294 $184852140 711

Colorado $44906648 $76413747 $31507099 588

Connecticut $30697189 $65768148 $35070959 467

Delaware $10064363 $11825432 $1761069 851

Florida $161429344 $202133975 $40704630 799

Georgia $92155238 $115086038 $22930800 801

Hawaii $16598408 $29917401 $13318993 555

Idaho $16757951 $18138483 $1380532 924

Illinois $89823202 $230416362 $140593161 390

Indiana $28971090 $43542361 $14571271 665

Iowa $33054838 $39536464 $6481626 836

Kansas $19696209 $28596716 $8900507 689

Kentucky $23282022 $51885561 $28603539 449

Louisiana $36140052 $53731083 $17591031 673

Maine $14532362 $17197897 $2665535 845

Maryland $52125680 $74080615 $21954935 704

Massachusetts $56786732 $93728000 $36941268 606

Michigan $64647414 $102250365 $37602952 632

Minnesota $68422729 $83611446 $15188717 818

Continued on next page

12

Mississippi $28135395 $44944890 $16809495 626

Missouri $58211187 $74846702 $16635515 778

Montana $11584819 $15966542 $4381723 726

Nebraska $14256785 $15783762 $1526977 903

Nevada $41560782 $55212291 $13651509 753

New Hampshire $8894798 $13747481 $4852683 647

New Jersey $81526803 $212243893 $130717090 384

New Mexico $28373494 $46539973 $18166479 610

New York $212076811 $216315013 $4238202 980

North Carolina $97635765 $110145689 $12509924 886

North Dakota $5675354 $8705612 $3030258 652

Ohio $157058983 $207077595 $50018612 758

Oklahoma $32237217 $39635039 $7397822 813

Oregon $69327500 $84476100 $15148600 821

Pennsylvania $83300714 $152136679 $68835965 548

Rhode Island $6485178 $11966274 $5481096 542

South Carolina $31207104 $56672828 $25465724 551

South Dakota $12235719 $12233387 -$2332 1000

Tennessee $48996019 $50135354 $1139335 977

Texas $183858309 $260330851 $76472542 706

Utah $31259522 $36708181 $5448659 852

Vermont $4341722 $6760162 $2418440 642

Virginia $76555264 $96893151 $20337887 790

Washington $92610488 $98658961 $6048473 939

West Virginia $15566369 $18923489 $3357120 823

Wisconsin $96737081 $100294768 $3557687 965

Wyoming $7914035 $11556643 $3642608 685

Total $2983360762 $4221152134 $1237791374 707

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

13

State

Beginning of year net

pension liability

Assumed rate of return

(weighted average

across plans)

Assumed interest due on 2018 beginning

of year debt

2018 normal costdagger

2018 total expected

costDagger

2018 employee

contributions with interest

2018 employer

contribution benchmarksect

2018 actual employer

contributions with interest

Percent of employer

benchmark paid

Net amortization||

Alabama $15251096 775 $1181960 $954407 $2136367 $767179 $1369188 $1293504 94 -$75684

Alaska $7243003 800 $579497 $242840 $822336 $128306 $694030 $556411 80 -$137619

Arizona $27416368 774 $2122280 $1825501 $3947780 $1347511 $2600269 $2162496 83 -$437773

Arkansas $7853261 710 $557951 $534527 $1092478 $219977 $872501 $776295 89 -$96206

California $191130787 707 $13503891 $14100694 $27604585 $6762629 $20841956 $24116619 116 $3274664

Colorado $54596452 485 $2648807 $2185834 $4834641 $819995 $4014647 $1903073 47 -$2111573

Connecticut $34811035 733 $2550487 $905880 $3456367 $526637 $2929730 $2840519 97 -$89212

Delaware $1961753 631 $123883 $236947 $360830 $79153 $281677 $280407 100 -$1271

Florida $40281942 617 $2483643 $2682437 $5166080 $772653 $4393427 $3501282 80 -$892145

Georgia $22889927 749 $1714408 $1674041 $3388449 $826840 $2561609 $2857440 112 $295831

Hawaii $12950306 700 $906521 $584470 $1490992 $268354 $1222637 $876760 72 -$345878

Idaho $1506653 710 $106972 $440220 $547193 $253207 $293986 $394422 134 $100436

Illinois $136881554 696 $9523705 $3351603 $12875308 $1541872 $11333437 $8143193 72 -$3190244

Indiana $17326203 675 $1169519 $602253 $1771772 $62405 $1709366 $1989838 116 $280471

Iowa $6840464 701 $479728 $881056 $1360783 $505976 $854807 $777309 91 -$77498

Kansas $9128629 775 $707469 $552423 $1259892 $436267 $823625 $921493 112 $97868

Appendix C Net amortization details 2018In thousands

Continued on next page

14

Kentucky $42916062 457 $1962340 $1344834 $3307174 $459624 $2847550 $1885289 66 -$962261

Louisiana $18214179 767 $1396832 $754930 $2151762 $599520 $1552242 $2117818 136 $565576

Maine $2995575 688 $205946 $293786 $499732 $196064 $303668 $411397 135 $107728

Maryland $22584000 736 $1663262 $1358213 $3021475 $824117 $2197359 $2110351 96 -$87008

Massachusetts $35710159 750 $2678262 $1757434 $4435696 $1406338 $3029358 $2674071 88 -$355287

Michigan $32483291 749 $2432624 $850399 $3283024 $448739 $2834285 $3675705 130 $841420

Minnesota $37198871 570 $2118482 $2394914 $4513396 $1140576 $3372821 $1399477 41 -$1973343

Mississippi $16783124 775 $1300692 $710195 $2010887 $595085 $1415802 $1073116 76 -$342685

Missouri $15774044 758 $1196427 $1233899 $2430326 $931469 $1498857 $1582607 106 $83750

Montana $4080482 769 $313807 $257534 $571341 $211668 $359673 $362690 101 $3017

Nebraska $1474474 804 $118563 $361308 $479872 $249491 $230380 $320606 139 $90225

Nevada $13319492 750 $998962 $1138361 $2137323 $1024105 $1113217 $970167 87 -$143051

New Hampshire $4965063 725 $359849 $273264 $633113 $226092 $407022 $444277 109 $37255

New Jersey $142288433 741 $10539842 $4970779 $15510621 $2168820 $13341800 $4691558 35 -$8650242

New Mexico $16485691 641 $1056961 $879231 $1936192 $591229 $1344963 $738207 55 -$606756

New York $11468876 700 $802821 $3678776 $4481597 $361411 $4120187 $4989268 121 $869081

North Carolina $9631900 721 $694086 $2370680 $3064766 $1383612 $1681154 $2207884 131 $526731

North Dakota $2987137 706 $210885 $244878 $455763 $164401 $291362 $198577 68 -$92785

Ohio $39735633 735 $2920649 $3071713 $5992362 $3055314 $2937048 $3748626 128 $811578

Oklahoma $8548375 747 $638452 $763718 $1402170 $456570 $945600 $1326526 140 $380926

Oregon $13480000 720 $970560 $1108200 $2078760 $13046 $2065714 $1439274 70 -$626440

Continued on next page

15

Note Numbers may not be exact due to rounding

The assumed rate of return is weighted for the plans in each state by the net pension liability at the beginning of 2018

dagger The normal cost refers to the cost of benefits earned by employees in any given year Also called the service cost

Dagger The total expected cost represents the projected increase in the funding gap before taking employer and employee contributions into account It is equal to the normal cost plus the assumed interest on the unfunded liability

sect The employer contribution benchmark is the contribution level employers need to meet in order to keep pension debt from growing

|| For net amortization positive numbers mean expected progress in paying down pension debt Negative numbers mean expected growth in pension debt

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Pennsylvania $66328481 725 $4808815 $2855906 $7664721 $1470963 $6193758 $6522941 105 $329183

Rhode Island $5454061 700 $381784 $152862 $534646 $96362 $438285 $433127 99 -$5157

South Carolina $25482182 725 $1847458 $1103205 $2950663 $1046631 $1904033 $1710476 90 -$193557

South Dakota -$9075 650 -$590 $222710 $222120 $128237 $93882 $128724 137 $34842

Tennessee $1695312 731 $123939 $853550 $977488 $348831 $628657 $1141243 182 $512586

Texas $55145722 687 $3787172 $6196686 $9983858 $4210268 $5773590 $4280858 74 -$1492733

Utah $3420315 695 $237712 $642590 $880302 $37553 $842749 $1177968 140 $335219

Vermont $2283896 793 $181025 $118295 $299320 $101237 $198082 $199899 101 $1816

Virginia $21480408 700 $1503629 $1888831 $3392460 $891439 $2501020 $2554085 102 $53065

Washington $9883432 737 $728406 $1931582 $2659988 $1100150 $1559838 $2827714 181 $1267876

West Virginia $3917091 750 $293782 $281951 $575733 $164283 $411449 $678234 165 $266785

Wisconsin -$2969118 700 -$207838 $1860937 $1653099 $1006427 $646671 $1065965 165 $419294

Wyoming $2700673 671 $181154 $236862 $418016 $178956 $239060 $178228 75 -$60832

16

Appendix D Details of changes to net pension liability 2018In thousands

StateBeginning of year net

pension liability

End of year net pension

liabilityTotal changes

Net amortization benchmark

Employer + other

contributions

Net amortization

Change to reconcile

Investment experience

Benefit changes

Actuarial experience

Actuarial changes

Alabama $15251096 $15228842 -$22254 $1369188 $1293504 -$75684 -$97938 -$544500 $0 $177032 $269530

Alaska $7243003 $6929477 -$313526 $694030 $556411 -$137619 -$451145 -$17225 $0 -$433920 $0

Arizona $27416368 $25215806 -$2200562 $2600269 $2162496 -$437773 -$2638335 -$826137 -$116011 $515560 -$2211747

Arkansas $7853261 $6508389 -$1344872 $872501 $776295 -$96206 -$1441078 -$959873 $0 $34562 -$515767

California $191130787 $184852140 -$6278647 $20841956 $24116619 $3274664 -$3003983 -$3031295 $668 $2158587 -$2131943

Colorado $54596452 $31507099 -$23089353 $4014647 $1903073 -$2111573 -$25200926 $4206458 -$5980577 $889134 -$24315941

Connecticut $34811035 $35070959 $259924 $2929730 $2840519 -$89212 $170712 $74367 $510940 -$414595 $0

Delaware $1961753 $1761069 -$200684 $281677 $280407 -$1271 -$201955 -$285729 $11154 $89307 -$16687

Florida $40281942 $40704631 $422689 $4393427 $3501282 -$892145 -$469456 -$3049099 $0 $742984 $1836659

Georgia $22889927 $22930800 $40873 $2561609 $2857440 $295831 $336704 -$1164304 $72381 $1084627 $344000

Hawaii $12950306 $13318993 $368687 $1222637 $876760 -$345878 $22810 -$101944 $0 $124753 $0

Idaho $1506653 $1380532 -$126121 $293986 $394422 $100436 -$25684 -$167683 $83585 -$47697 $106111

Illinois $136881554 $140593161 $3711607 $11333437 $8143193 -$3190244 $521363 -$797304 -$374603 $731439 $961832

Indiana $17326203 $14571271 -$2754932 $1709366 $1989838 $280471 -$2474461 -$619782 $0 -$169086 -$1685593

Iowa $6840464 $6481626 -$358838 $854807 $777309 -$77498 -$436336 -$363061 -$1208 -$140228 $68161

Kansas $9128629 $8900507 -$228122 $823625 $921493 $97868 -$130254 -$83111 $0 -$47143 $0

Kentucky $42916062 $28603539 -$14312523 $2847550 $1885289 -$962261 -$15274784 -$1098415 $10513 -$19567 -$14167315

Louisiana $18214179 $17591031 -$623148 $1552242 $2117818 $565576 -$57572 -$696779 $658 -$195920 $834469

Continued on next page

17

Maine $2995575 $2665535 -$330041 $303668 $411397 $107728 -$222312 -$391240 -$106123 $35815 $239236

Maryland $22584000 $21954935 -$629065 $2197359 $2110351 -$87008 -$716073 -$185256 $5505 -$653748 $117426

Massachusetts $35710159 $36941268 $1231109 $3029358 $2674071 -$355287 $875822 -$785503 $0 $194325 $1467000

Michigan $32483291 $37602953 $5119662 $2834285 $3675705 $841420 $5961081 -$2089131 $0 -$64336 $8114548

Minnesota $37198871 $15188717 -$22010154 $3372821 $1399477 -$1973343 -$23983497 -$2573005 -$5765677 $1583 -$15646398

Mississippi $16783124 $16809495 $26371 $1415802 $1073116 -$342685 -$316314 -$354928 $0 $38614 $0

Missouri $15774044 $16635515 $861471 $1498857 $1582607 $83750 $945221 -$404892 -$8 -$7407 $1357528

Montana $4080482 $4381723 $301241 $359673 $362690 $3017 $304258 -$109601 $0 $207538 $206321

Nebraska $1474474 $1526977 $52503 $230380 $320606 $90225 $142728 $119428 $88636 -$65335 $0

Nevada $13319492 $13651509 $332017 $1113217 $970167 -$143051 $188966 -$315116 $0 $504082 $0

New Hampshire

$4965063 $4852683 -$112380 $407022 $444277 $37255 -$75125 -$108669 $0 $29109 $4435

New Jersey $142288433 $130717090 -$11571343 $13341800 $4691558 -$8650242 -$20221585 -$6169156 $0 $850491 -$14902920

New Mexico $16485691 $18166479 $1680788 $1344963 $738207 -$606756 $1074032 -$58134 $0 -$74477 $1206643

New York $11468876 $4238202 -$7230674 $4120187 $4989268 $869081 -$6361593 -$7838038 $0 $1476445 $0

North Carolina $9631900 $12509924 $2878024 $1681154 $2207884 $526731 $3404755 -$100834 $44793 $1199449 $2261347

North Dakota $2987137 $3030258 $43121 $291362 $198577 -$92785 -$49665 -$86485 $0 -$94216 $131036

Ohio $39735633 $50018612 $10282979 $2937048 $3748626 $811578 $11094557 $7711615 $0 -$307530 $3690472

Oklahoma $8548375 $7397822 -$1150553 $945600 $1326526 $380926 -$769626 -$575769 -$113763 -$105401 $25307

Oregon $13480000 $15148600 $1668600 $2065714 $1439274 -$626440 $1042160 -$1272440 $0 $74300 $2240300

Pennsylvania $66328481 $68835965 $2507484 $6193758 $6522941 $329183 $2836667 $3414973 $0 -$578306 $0

Rhode Island $5454061 $5481096 $27035 $438285 $433127 -$5157 $21877 -$50633 $0 $72627 -$116

South Carolina $25482182 $25465724 -$16458 $1904033 $1710476 -$193557 -$210015 -$136380 $0 -$73635 $0

Continued on next page

18

Sources Comprehensive annual financial reports actuarial reports and valuations or other public documents or as provided by plan

copy 2020 The Pew Charitable Trusts

Appendix E Debt driversStatesrsquo improved fiscal position in 2018 was driven by strong investment returnsmdash86 for those reporting on a fiscal year ending June 30mdashthat exceeded plan assumptions On their own investment returns lowered the cumulative funding gap by more than $10 billion although this reduction was offset by insufficient contributions Average performance through the following fiscal year ending June 30 2019 was under 710 Economic conditions in the third quarter of fiscal year 2020 point to a shortfall in meeting investment targets and an increase in unfunded liabilities of up to $500 billion nine months through the fiscal year

States cannot rely on investment income alone to chip away at their accumulated pension debt Pew has collected annual financial data on state-run pension systems since before the recession But even after a decade of economic recovery states have made limited progress in paying down pension debt In fact since 2007 the shortfall between actual contributions to state pension plans and minimum actuarial funding standards was $200 billion11

Changes to plan assumptions also decreased reported liabilities by $30 billion in 2018 however that result is driven by Colorado Kentucky Minnesota and New Jersey where improvements in funded status allowed plans to substantially increase their discount rates The remaining 46 states reported an increase in liabilities of $39 billion from assumption changes

South Dakota -$9075 -$2332 $6743 $93882 $128724 $34842 $41585 -$145567 $0 $5221 $181932

Tennessee $1695312 $1139335 -$555977 $628657 $1141243 $512586 -$43391 -$606253 $17316 -$32315 $577861

Texas $55145722 $76472542 $21326821 $5773590 $4280858 -$1492733 $19834088 -$274164 $2825 $68677 $20036750

Utah $3420315 $5448659 $2028344 $842749 $1177968 $335219 $2363563 $2338849 $0 $24714 $0

Vermont $2283896 $2418440 $134544 $198082 $199899 $1816 $136361 $12217 $194 $156907 -$32957

Virginia $21480408 $20337887 -$1142521 $2501020 $2554085 $53065 -$1089456 -$240348 $10811 -$859919 $0

Washington $9883432 $6048473 -$3834959 $1559838 $2827714 $1267876 -$2567083 -$1546224 $175100 -$118086 -$1077873

West Virginia $3917091 $3357120 -$559971 $411449 $678234 $266785 -$293186 -$279644 $0 -$14504 $962

Wisconsin -$2969118 $3557687 $6526805 $646671 $1065965 $419294 $6946099 $11552920 $0 -$4968302 $361481

Wyoming $2700673 $3642608 $941935 $239060 $178228 -$60832 $881102 $882867 $0 -$67752 $65987

Total $1276007674 $1237791374 -$38216300 $126118030 $114658013 -$11460017 -$49676317 -$10189958 -$11422892 $1934455 -$29997922

19

Change in Pension DebtStrong investment performance and changes in assumptions reduced reported pension debt by $10 billion and $30 billion respectively

Source Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Appendix F Net amortization benchmarkThe benchmark is calculated by taking the sum of service cost (the actuarial value of the benefits earned in 2018 also called normal cost) and interest on the net pension liability at the beginning of the year (each pension planrsquos total pension liability and the net pension liability both grow annually at the planrsquos assumed rate of return) and subtracting employee contributions Employer and employee contributions are adjusted to reflect expected interest After subtracting the $43 billion contributed by workers nationwide in 2018 (including interest) employers would have needed to contribute $126 billion to meet the net amortization benchmark to keep pension debt from growing To actually make progress on closing the funding gap states would have to exceed the contribution benchmark on a consistent basis

In b

illio

ns

$0

$200

$400

$600

$800

$1000

$1200

$1400

2018 netpension liability

Other factorsNetamortization

Changes inassumptions

Investmentgains

2017 netpension liability

$1276 -$10 -$30 -$9$11 $1238

For further information please visit pewtrustsorgpensions

Contact Sarah Jones communications officer Email sjonespewtrustsorg Project website pewtrustsorgpensions

The Pew Charitable Trusts is driven by the power of knowledge to solve todayrsquos most challenging problems Pew applies a rigorous analytical approach to improve public policy inform the public and invigorate civic life

Endnotes1 See Appendix F for more information on the net amortization benchmark

2 For example the US experienced annual gross domestic product (GDP) growth of more than 55 from 1988 through 2007 while the Congressional Budget Office now projects only 4 annual growth for the next decade See Congressional Budget Office ldquoThe Budget and Economic Outlook 2019 to 2029rdquo (2019) httpswwwcbogovsstemfiles2019-0354918-Outlook-3pdf

3 See SEBAC 2017 Agreement httpaftctorgsitesaftctorgfilessebac_2017_ta_signedpdf for details on Connecticut State Employees Retirement System (SERS) pension reforms

4 See Fitch Ratings ldquoConnecticut Teacher Pension Changes Costly but Lower Fiscal Risksrdquo Feb 28 2019 httpswwwfitchratingscomsitepr10064878

5 National Association of State Retirement Administrators ldquoNASRA Issue Brief Public Pension Plan Investment Return Assumptionsrdquo (updated April 2014) httpwwwnasraorgfilesIssue20BriefsNASRAInvReturnAssumptBriefpdf

6 Low return scenario assumes a 5 return

7 K Brainard and A Brown ldquoIn-Depth Risk Sharing in Public Retirement Plansrdquo (National Association of State Retirement Administrators 2018)

8 GASB Statement 67 on Financial Reporting for Pension Plans does also require an adjustment to the discount rate assumptionsmdashresulting in a higher reported pension liabilitymdashif current contribution policies are deemed insufficient However as of 2018 reporting only nine of the largest 100 plans across the 50 states are required to make this adjustment down from 15 in 2017

9 The Pew Charitable Trusts ldquoFoundation for Public Pensions Risk Reportingrdquo (2018) httpswwwhksharvardedusitesdefaultfilescentersmrcbgprogramsFoundation20for20Pensions20Risk20Reporting20(Strawman)pdf

10 Wilshire Trust Universe Comparison Service and Wilshire TUCS are service marks of Wilshire Associates Inc (ldquoWilshirerdquo) and have been licensed for use by The Pew Charitable Trusts All content of Wilshire TUCS is copyright 2019 Wilshire Associates Inc all rights reserved

11 Accounting standards changed in 2014 From 2007 to 2013 the shortfall is calculated between the actuarial recommended contribution and actual employer contributions From 2014 to 2018 the shortfall represents the gap between the net amortization benchmark and employer contributions

10

impact of contribution risk on pension system financial position and provide a framework to evaluate policy proposals to strengthen state fiscal health

ConclusionAlthough many state and local pension plans are still vulnerable to market volatility and recession others have weathered past economic downturns well In the near-term state and local officials will continue to focus on the COVID-19 pandemic while navigating a host of budget challenges including declining revenue and an increased need for safety net programs As decision-makers confront these challenges a careful evaluation of successful systemsrsquo policies reveals common practices that can serve as a toolkit for policymakers to strengthen their statesrsquo pension plans over the long-term All states should consider

bull Funding at levels that target debt reduction Plans that consistently make annual payments sufficient to pay for current benefits as well as reduce a portion of pension debt are more likely to recover quickly from economic downturns and better weather recessions

bull Decreasing assumed returns and discount rates Forecasts of lower-than-historical economic growth and bond yields over the next 10 to 20 years drive the growing consensus that pension funds should plan for lower long-term investment returns than those of the past

bull Ensuring cost predictability Plans with cost-sharing features were the ones most likely to recover quickly from the downturns of the first decade of the 2000s and to maintain a strong financial position throughout the recovery

bull Employing stress testing and public risk reporting States that regularly assess whether current pension policies are sustainable throughout the economic cycle and over time have the information necessary to ensure that pension plans will be resilient during downturns

There is no one-size-fits-all solution when it comes to plan structure and design However the practices of well-funded plans of all types indicate that these four policy prescriptions can help achieve and maintain fiscal sustainability for pension balance sheets and sponsoring government balance sheets as well as ensure that benefits will be paid to the workers and retirees who depend on them

Appendix A MethodologyAll figures presented are as reported in public documents or as provided by plan officials The main data sources used were the comprehensive annual financial reports produced by each state and pension plan actuarial reports and valuations and other state documents that disclose financial details about public employment retirement systems Pew collected data for more than 230 pension plans

Pew shared the collected data with plan officials to give them an opportunity to review them and to provide additional information This feedback was incorporated into the data presented in this brief

Because of lags in valuation for many state pension plans only partial 2019 data were available and fiscal 2018 is the most recent year for which comprehensive data were available for all 50 states Data on Tennessee aggregate political subdivisions were not available for fiscal 2018 so data were rolled forward from 2017 Data on a subset of California local governments participating in the California Public Employeesrsquo Retirement System were not available in aggregate and were not included in our data

Each state retirement system uses different key assumptions and methods in presenting its financial information Pew made no adjustments or changes to the presentation of aggregate state asset or liability data for this brief

11

Assumptions underlying each statersquos funding data include the assumed rate of return on investments and estimates of employeesrsquo life spans retirement ages salary growth marriage rates retention rates and other demographic characteristics

Appendix B State data 2018In thousands

State Assets (plan net position) Liabilities (total pension liability)

Pension debt (net pension liability) Funded ratio

Alabama $38973099 $54201941 $15228842 719

Alaska $14995615 $21925093 $6929477 684

Arizona $47908905 $73124711 $25215806 655

Arkansas $28149299 $34657689 $6508389 812

California $455619154 $640471294 $184852140 711

Colorado $44906648 $76413747 $31507099 588

Connecticut $30697189 $65768148 $35070959 467

Delaware $10064363 $11825432 $1761069 851

Florida $161429344 $202133975 $40704630 799

Georgia $92155238 $115086038 $22930800 801

Hawaii $16598408 $29917401 $13318993 555

Idaho $16757951 $18138483 $1380532 924

Illinois $89823202 $230416362 $140593161 390

Indiana $28971090 $43542361 $14571271 665

Iowa $33054838 $39536464 $6481626 836

Kansas $19696209 $28596716 $8900507 689

Kentucky $23282022 $51885561 $28603539 449

Louisiana $36140052 $53731083 $17591031 673

Maine $14532362 $17197897 $2665535 845

Maryland $52125680 $74080615 $21954935 704

Massachusetts $56786732 $93728000 $36941268 606

Michigan $64647414 $102250365 $37602952 632

Minnesota $68422729 $83611446 $15188717 818

Continued on next page

12

Mississippi $28135395 $44944890 $16809495 626

Missouri $58211187 $74846702 $16635515 778

Montana $11584819 $15966542 $4381723 726

Nebraska $14256785 $15783762 $1526977 903

Nevada $41560782 $55212291 $13651509 753

New Hampshire $8894798 $13747481 $4852683 647

New Jersey $81526803 $212243893 $130717090 384

New Mexico $28373494 $46539973 $18166479 610

New York $212076811 $216315013 $4238202 980

North Carolina $97635765 $110145689 $12509924 886

North Dakota $5675354 $8705612 $3030258 652

Ohio $157058983 $207077595 $50018612 758

Oklahoma $32237217 $39635039 $7397822 813

Oregon $69327500 $84476100 $15148600 821

Pennsylvania $83300714 $152136679 $68835965 548

Rhode Island $6485178 $11966274 $5481096 542

South Carolina $31207104 $56672828 $25465724 551

South Dakota $12235719 $12233387 -$2332 1000

Tennessee $48996019 $50135354 $1139335 977

Texas $183858309 $260330851 $76472542 706

Utah $31259522 $36708181 $5448659 852

Vermont $4341722 $6760162 $2418440 642

Virginia $76555264 $96893151 $20337887 790

Washington $92610488 $98658961 $6048473 939

West Virginia $15566369 $18923489 $3357120 823

Wisconsin $96737081 $100294768 $3557687 965

Wyoming $7914035 $11556643 $3642608 685

Total $2983360762 $4221152134 $1237791374 707

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

13

State

Beginning of year net

pension liability

Assumed rate of return

(weighted average

across plans)

Assumed interest due on 2018 beginning

of year debt

2018 normal costdagger

2018 total expected

costDagger

2018 employee

contributions with interest

2018 employer

contribution benchmarksect

2018 actual employer

contributions with interest

Percent of employer

benchmark paid

Net amortization||

Alabama $15251096 775 $1181960 $954407 $2136367 $767179 $1369188 $1293504 94 -$75684

Alaska $7243003 800 $579497 $242840 $822336 $128306 $694030 $556411 80 -$137619

Arizona $27416368 774 $2122280 $1825501 $3947780 $1347511 $2600269 $2162496 83 -$437773

Arkansas $7853261 710 $557951 $534527 $1092478 $219977 $872501 $776295 89 -$96206

California $191130787 707 $13503891 $14100694 $27604585 $6762629 $20841956 $24116619 116 $3274664

Colorado $54596452 485 $2648807 $2185834 $4834641 $819995 $4014647 $1903073 47 -$2111573

Connecticut $34811035 733 $2550487 $905880 $3456367 $526637 $2929730 $2840519 97 -$89212

Delaware $1961753 631 $123883 $236947 $360830 $79153 $281677 $280407 100 -$1271

Florida $40281942 617 $2483643 $2682437 $5166080 $772653 $4393427 $3501282 80 -$892145

Georgia $22889927 749 $1714408 $1674041 $3388449 $826840 $2561609 $2857440 112 $295831

Hawaii $12950306 700 $906521 $584470 $1490992 $268354 $1222637 $876760 72 -$345878

Idaho $1506653 710 $106972 $440220 $547193 $253207 $293986 $394422 134 $100436

Illinois $136881554 696 $9523705 $3351603 $12875308 $1541872 $11333437 $8143193 72 -$3190244

Indiana $17326203 675 $1169519 $602253 $1771772 $62405 $1709366 $1989838 116 $280471

Iowa $6840464 701 $479728 $881056 $1360783 $505976 $854807 $777309 91 -$77498

Kansas $9128629 775 $707469 $552423 $1259892 $436267 $823625 $921493 112 $97868

Appendix C Net amortization details 2018In thousands

Continued on next page

14

Kentucky $42916062 457 $1962340 $1344834 $3307174 $459624 $2847550 $1885289 66 -$962261

Louisiana $18214179 767 $1396832 $754930 $2151762 $599520 $1552242 $2117818 136 $565576

Maine $2995575 688 $205946 $293786 $499732 $196064 $303668 $411397 135 $107728

Maryland $22584000 736 $1663262 $1358213 $3021475 $824117 $2197359 $2110351 96 -$87008

Massachusetts $35710159 750 $2678262 $1757434 $4435696 $1406338 $3029358 $2674071 88 -$355287

Michigan $32483291 749 $2432624 $850399 $3283024 $448739 $2834285 $3675705 130 $841420

Minnesota $37198871 570 $2118482 $2394914 $4513396 $1140576 $3372821 $1399477 41 -$1973343

Mississippi $16783124 775 $1300692 $710195 $2010887 $595085 $1415802 $1073116 76 -$342685

Missouri $15774044 758 $1196427 $1233899 $2430326 $931469 $1498857 $1582607 106 $83750

Montana $4080482 769 $313807 $257534 $571341 $211668 $359673 $362690 101 $3017

Nebraska $1474474 804 $118563 $361308 $479872 $249491 $230380 $320606 139 $90225

Nevada $13319492 750 $998962 $1138361 $2137323 $1024105 $1113217 $970167 87 -$143051

New Hampshire $4965063 725 $359849 $273264 $633113 $226092 $407022 $444277 109 $37255

New Jersey $142288433 741 $10539842 $4970779 $15510621 $2168820 $13341800 $4691558 35 -$8650242

New Mexico $16485691 641 $1056961 $879231 $1936192 $591229 $1344963 $738207 55 -$606756

New York $11468876 700 $802821 $3678776 $4481597 $361411 $4120187 $4989268 121 $869081

North Carolina $9631900 721 $694086 $2370680 $3064766 $1383612 $1681154 $2207884 131 $526731

North Dakota $2987137 706 $210885 $244878 $455763 $164401 $291362 $198577 68 -$92785

Ohio $39735633 735 $2920649 $3071713 $5992362 $3055314 $2937048 $3748626 128 $811578

Oklahoma $8548375 747 $638452 $763718 $1402170 $456570 $945600 $1326526 140 $380926

Oregon $13480000 720 $970560 $1108200 $2078760 $13046 $2065714 $1439274 70 -$626440

Continued on next page

15

Note Numbers may not be exact due to rounding

The assumed rate of return is weighted for the plans in each state by the net pension liability at the beginning of 2018

dagger The normal cost refers to the cost of benefits earned by employees in any given year Also called the service cost

Dagger The total expected cost represents the projected increase in the funding gap before taking employer and employee contributions into account It is equal to the normal cost plus the assumed interest on the unfunded liability

sect The employer contribution benchmark is the contribution level employers need to meet in order to keep pension debt from growing

|| For net amortization positive numbers mean expected progress in paying down pension debt Negative numbers mean expected growth in pension debt

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Pennsylvania $66328481 725 $4808815 $2855906 $7664721 $1470963 $6193758 $6522941 105 $329183

Rhode Island $5454061 700 $381784 $152862 $534646 $96362 $438285 $433127 99 -$5157

South Carolina $25482182 725 $1847458 $1103205 $2950663 $1046631 $1904033 $1710476 90 -$193557

South Dakota -$9075 650 -$590 $222710 $222120 $128237 $93882 $128724 137 $34842

Tennessee $1695312 731 $123939 $853550 $977488 $348831 $628657 $1141243 182 $512586

Texas $55145722 687 $3787172 $6196686 $9983858 $4210268 $5773590 $4280858 74 -$1492733

Utah $3420315 695 $237712 $642590 $880302 $37553 $842749 $1177968 140 $335219

Vermont $2283896 793 $181025 $118295 $299320 $101237 $198082 $199899 101 $1816

Virginia $21480408 700 $1503629 $1888831 $3392460 $891439 $2501020 $2554085 102 $53065

Washington $9883432 737 $728406 $1931582 $2659988 $1100150 $1559838 $2827714 181 $1267876

West Virginia $3917091 750 $293782 $281951 $575733 $164283 $411449 $678234 165 $266785

Wisconsin -$2969118 700 -$207838 $1860937 $1653099 $1006427 $646671 $1065965 165 $419294

Wyoming $2700673 671 $181154 $236862 $418016 $178956 $239060 $178228 75 -$60832

16

Appendix D Details of changes to net pension liability 2018In thousands

StateBeginning of year net

pension liability

End of year net pension

liabilityTotal changes

Net amortization benchmark

Employer + other

contributions

Net amortization

Change to reconcile

Investment experience

Benefit changes

Actuarial experience

Actuarial changes

Alabama $15251096 $15228842 -$22254 $1369188 $1293504 -$75684 -$97938 -$544500 $0 $177032 $269530

Alaska $7243003 $6929477 -$313526 $694030 $556411 -$137619 -$451145 -$17225 $0 -$433920 $0

Arizona $27416368 $25215806 -$2200562 $2600269 $2162496 -$437773 -$2638335 -$826137 -$116011 $515560 -$2211747

Arkansas $7853261 $6508389 -$1344872 $872501 $776295 -$96206 -$1441078 -$959873 $0 $34562 -$515767

California $191130787 $184852140 -$6278647 $20841956 $24116619 $3274664 -$3003983 -$3031295 $668 $2158587 -$2131943

Colorado $54596452 $31507099 -$23089353 $4014647 $1903073 -$2111573 -$25200926 $4206458 -$5980577 $889134 -$24315941

Connecticut $34811035 $35070959 $259924 $2929730 $2840519 -$89212 $170712 $74367 $510940 -$414595 $0

Delaware $1961753 $1761069 -$200684 $281677 $280407 -$1271 -$201955 -$285729 $11154 $89307 -$16687

Florida $40281942 $40704631 $422689 $4393427 $3501282 -$892145 -$469456 -$3049099 $0 $742984 $1836659

Georgia $22889927 $22930800 $40873 $2561609 $2857440 $295831 $336704 -$1164304 $72381 $1084627 $344000

Hawaii $12950306 $13318993 $368687 $1222637 $876760 -$345878 $22810 -$101944 $0 $124753 $0

Idaho $1506653 $1380532 -$126121 $293986 $394422 $100436 -$25684 -$167683 $83585 -$47697 $106111

Illinois $136881554 $140593161 $3711607 $11333437 $8143193 -$3190244 $521363 -$797304 -$374603 $731439 $961832

Indiana $17326203 $14571271 -$2754932 $1709366 $1989838 $280471 -$2474461 -$619782 $0 -$169086 -$1685593

Iowa $6840464 $6481626 -$358838 $854807 $777309 -$77498 -$436336 -$363061 -$1208 -$140228 $68161

Kansas $9128629 $8900507 -$228122 $823625 $921493 $97868 -$130254 -$83111 $0 -$47143 $0

Kentucky $42916062 $28603539 -$14312523 $2847550 $1885289 -$962261 -$15274784 -$1098415 $10513 -$19567 -$14167315

Louisiana $18214179 $17591031 -$623148 $1552242 $2117818 $565576 -$57572 -$696779 $658 -$195920 $834469

Continued on next page

17

Maine $2995575 $2665535 -$330041 $303668 $411397 $107728 -$222312 -$391240 -$106123 $35815 $239236

Maryland $22584000 $21954935 -$629065 $2197359 $2110351 -$87008 -$716073 -$185256 $5505 -$653748 $117426

Massachusetts $35710159 $36941268 $1231109 $3029358 $2674071 -$355287 $875822 -$785503 $0 $194325 $1467000

Michigan $32483291 $37602953 $5119662 $2834285 $3675705 $841420 $5961081 -$2089131 $0 -$64336 $8114548

Minnesota $37198871 $15188717 -$22010154 $3372821 $1399477 -$1973343 -$23983497 -$2573005 -$5765677 $1583 -$15646398

Mississippi $16783124 $16809495 $26371 $1415802 $1073116 -$342685 -$316314 -$354928 $0 $38614 $0

Missouri $15774044 $16635515 $861471 $1498857 $1582607 $83750 $945221 -$404892 -$8 -$7407 $1357528

Montana $4080482 $4381723 $301241 $359673 $362690 $3017 $304258 -$109601 $0 $207538 $206321

Nebraska $1474474 $1526977 $52503 $230380 $320606 $90225 $142728 $119428 $88636 -$65335 $0

Nevada $13319492 $13651509 $332017 $1113217 $970167 -$143051 $188966 -$315116 $0 $504082 $0

New Hampshire

$4965063 $4852683 -$112380 $407022 $444277 $37255 -$75125 -$108669 $0 $29109 $4435

New Jersey $142288433 $130717090 -$11571343 $13341800 $4691558 -$8650242 -$20221585 -$6169156 $0 $850491 -$14902920

New Mexico $16485691 $18166479 $1680788 $1344963 $738207 -$606756 $1074032 -$58134 $0 -$74477 $1206643

New York $11468876 $4238202 -$7230674 $4120187 $4989268 $869081 -$6361593 -$7838038 $0 $1476445 $0

North Carolina $9631900 $12509924 $2878024 $1681154 $2207884 $526731 $3404755 -$100834 $44793 $1199449 $2261347

North Dakota $2987137 $3030258 $43121 $291362 $198577 -$92785 -$49665 -$86485 $0 -$94216 $131036

Ohio $39735633 $50018612 $10282979 $2937048 $3748626 $811578 $11094557 $7711615 $0 -$307530 $3690472

Oklahoma $8548375 $7397822 -$1150553 $945600 $1326526 $380926 -$769626 -$575769 -$113763 -$105401 $25307

Oregon $13480000 $15148600 $1668600 $2065714 $1439274 -$626440 $1042160 -$1272440 $0 $74300 $2240300

Pennsylvania $66328481 $68835965 $2507484 $6193758 $6522941 $329183 $2836667 $3414973 $0 -$578306 $0

Rhode Island $5454061 $5481096 $27035 $438285 $433127 -$5157 $21877 -$50633 $0 $72627 -$116

South Carolina $25482182 $25465724 -$16458 $1904033 $1710476 -$193557 -$210015 -$136380 $0 -$73635 $0

Continued on next page

18

Sources Comprehensive annual financial reports actuarial reports and valuations or other public documents or as provided by plan

copy 2020 The Pew Charitable Trusts

Appendix E Debt driversStatesrsquo improved fiscal position in 2018 was driven by strong investment returnsmdash86 for those reporting on a fiscal year ending June 30mdashthat exceeded plan assumptions On their own investment returns lowered the cumulative funding gap by more than $10 billion although this reduction was offset by insufficient contributions Average performance through the following fiscal year ending June 30 2019 was under 710 Economic conditions in the third quarter of fiscal year 2020 point to a shortfall in meeting investment targets and an increase in unfunded liabilities of up to $500 billion nine months through the fiscal year

States cannot rely on investment income alone to chip away at their accumulated pension debt Pew has collected annual financial data on state-run pension systems since before the recession But even after a decade of economic recovery states have made limited progress in paying down pension debt In fact since 2007 the shortfall between actual contributions to state pension plans and minimum actuarial funding standards was $200 billion11

Changes to plan assumptions also decreased reported liabilities by $30 billion in 2018 however that result is driven by Colorado Kentucky Minnesota and New Jersey where improvements in funded status allowed plans to substantially increase their discount rates The remaining 46 states reported an increase in liabilities of $39 billion from assumption changes

South Dakota -$9075 -$2332 $6743 $93882 $128724 $34842 $41585 -$145567 $0 $5221 $181932

Tennessee $1695312 $1139335 -$555977 $628657 $1141243 $512586 -$43391 -$606253 $17316 -$32315 $577861

Texas $55145722 $76472542 $21326821 $5773590 $4280858 -$1492733 $19834088 -$274164 $2825 $68677 $20036750

Utah $3420315 $5448659 $2028344 $842749 $1177968 $335219 $2363563 $2338849 $0 $24714 $0

Vermont $2283896 $2418440 $134544 $198082 $199899 $1816 $136361 $12217 $194 $156907 -$32957

Virginia $21480408 $20337887 -$1142521 $2501020 $2554085 $53065 -$1089456 -$240348 $10811 -$859919 $0

Washington $9883432 $6048473 -$3834959 $1559838 $2827714 $1267876 -$2567083 -$1546224 $175100 -$118086 -$1077873

West Virginia $3917091 $3357120 -$559971 $411449 $678234 $266785 -$293186 -$279644 $0 -$14504 $962

Wisconsin -$2969118 $3557687 $6526805 $646671 $1065965 $419294 $6946099 $11552920 $0 -$4968302 $361481

Wyoming $2700673 $3642608 $941935 $239060 $178228 -$60832 $881102 $882867 $0 -$67752 $65987

Total $1276007674 $1237791374 -$38216300 $126118030 $114658013 -$11460017 -$49676317 -$10189958 -$11422892 $1934455 -$29997922

19

Change in Pension DebtStrong investment performance and changes in assumptions reduced reported pension debt by $10 billion and $30 billion respectively

Source Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Appendix F Net amortization benchmarkThe benchmark is calculated by taking the sum of service cost (the actuarial value of the benefits earned in 2018 also called normal cost) and interest on the net pension liability at the beginning of the year (each pension planrsquos total pension liability and the net pension liability both grow annually at the planrsquos assumed rate of return) and subtracting employee contributions Employer and employee contributions are adjusted to reflect expected interest After subtracting the $43 billion contributed by workers nationwide in 2018 (including interest) employers would have needed to contribute $126 billion to meet the net amortization benchmark to keep pension debt from growing To actually make progress on closing the funding gap states would have to exceed the contribution benchmark on a consistent basis

In b

illio

ns

$0

$200

$400

$600

$800

$1000

$1200

$1400

2018 netpension liability

Other factorsNetamortization

Changes inassumptions

Investmentgains

2017 netpension liability

$1276 -$10 -$30 -$9$11 $1238

For further information please visit pewtrustsorgpensions

Contact Sarah Jones communications officer Email sjonespewtrustsorg Project website pewtrustsorgpensions

The Pew Charitable Trusts is driven by the power of knowledge to solve todayrsquos most challenging problems Pew applies a rigorous analytical approach to improve public policy inform the public and invigorate civic life

Endnotes1 See Appendix F for more information on the net amortization benchmark

2 For example the US experienced annual gross domestic product (GDP) growth of more than 55 from 1988 through 2007 while the Congressional Budget Office now projects only 4 annual growth for the next decade See Congressional Budget Office ldquoThe Budget and Economic Outlook 2019 to 2029rdquo (2019) httpswwwcbogovsstemfiles2019-0354918-Outlook-3pdf

3 See SEBAC 2017 Agreement httpaftctorgsitesaftctorgfilessebac_2017_ta_signedpdf for details on Connecticut State Employees Retirement System (SERS) pension reforms

4 See Fitch Ratings ldquoConnecticut Teacher Pension Changes Costly but Lower Fiscal Risksrdquo Feb 28 2019 httpswwwfitchratingscomsitepr10064878

5 National Association of State Retirement Administrators ldquoNASRA Issue Brief Public Pension Plan Investment Return Assumptionsrdquo (updated April 2014) httpwwwnasraorgfilesIssue20BriefsNASRAInvReturnAssumptBriefpdf

6 Low return scenario assumes a 5 return

7 K Brainard and A Brown ldquoIn-Depth Risk Sharing in Public Retirement Plansrdquo (National Association of State Retirement Administrators 2018)

8 GASB Statement 67 on Financial Reporting for Pension Plans does also require an adjustment to the discount rate assumptionsmdashresulting in a higher reported pension liabilitymdashif current contribution policies are deemed insufficient However as of 2018 reporting only nine of the largest 100 plans across the 50 states are required to make this adjustment down from 15 in 2017

9 The Pew Charitable Trusts ldquoFoundation for Public Pensions Risk Reportingrdquo (2018) httpswwwhksharvardedusitesdefaultfilescentersmrcbgprogramsFoundation20for20Pensions20Risk20Reporting20(Strawman)pdf

10 Wilshire Trust Universe Comparison Service and Wilshire TUCS are service marks of Wilshire Associates Inc (ldquoWilshirerdquo) and have been licensed for use by The Pew Charitable Trusts All content of Wilshire TUCS is copyright 2019 Wilshire Associates Inc all rights reserved

11 Accounting standards changed in 2014 From 2007 to 2013 the shortfall is calculated between the actuarial recommended contribution and actual employer contributions From 2014 to 2018 the shortfall represents the gap between the net amortization benchmark and employer contributions

11

Assumptions underlying each statersquos funding data include the assumed rate of return on investments and estimates of employeesrsquo life spans retirement ages salary growth marriage rates retention rates and other demographic characteristics

Appendix B State data 2018In thousands

State Assets (plan net position) Liabilities (total pension liability)

Pension debt (net pension liability) Funded ratio

Alabama $38973099 $54201941 $15228842 719

Alaska $14995615 $21925093 $6929477 684

Arizona $47908905 $73124711 $25215806 655

Arkansas $28149299 $34657689 $6508389 812

California $455619154 $640471294 $184852140 711

Colorado $44906648 $76413747 $31507099 588

Connecticut $30697189 $65768148 $35070959 467

Delaware $10064363 $11825432 $1761069 851

Florida $161429344 $202133975 $40704630 799

Georgia $92155238 $115086038 $22930800 801

Hawaii $16598408 $29917401 $13318993 555

Idaho $16757951 $18138483 $1380532 924

Illinois $89823202 $230416362 $140593161 390

Indiana $28971090 $43542361 $14571271 665

Iowa $33054838 $39536464 $6481626 836

Kansas $19696209 $28596716 $8900507 689

Kentucky $23282022 $51885561 $28603539 449

Louisiana $36140052 $53731083 $17591031 673

Maine $14532362 $17197897 $2665535 845

Maryland $52125680 $74080615 $21954935 704

Massachusetts $56786732 $93728000 $36941268 606

Michigan $64647414 $102250365 $37602952 632

Minnesota $68422729 $83611446 $15188717 818

Continued on next page

12

Mississippi $28135395 $44944890 $16809495 626

Missouri $58211187 $74846702 $16635515 778

Montana $11584819 $15966542 $4381723 726

Nebraska $14256785 $15783762 $1526977 903

Nevada $41560782 $55212291 $13651509 753

New Hampshire $8894798 $13747481 $4852683 647

New Jersey $81526803 $212243893 $130717090 384

New Mexico $28373494 $46539973 $18166479 610

New York $212076811 $216315013 $4238202 980

North Carolina $97635765 $110145689 $12509924 886

North Dakota $5675354 $8705612 $3030258 652

Ohio $157058983 $207077595 $50018612 758

Oklahoma $32237217 $39635039 $7397822 813

Oregon $69327500 $84476100 $15148600 821

Pennsylvania $83300714 $152136679 $68835965 548

Rhode Island $6485178 $11966274 $5481096 542

South Carolina $31207104 $56672828 $25465724 551

South Dakota $12235719 $12233387 -$2332 1000

Tennessee $48996019 $50135354 $1139335 977

Texas $183858309 $260330851 $76472542 706

Utah $31259522 $36708181 $5448659 852

Vermont $4341722 $6760162 $2418440 642

Virginia $76555264 $96893151 $20337887 790

Washington $92610488 $98658961 $6048473 939

West Virginia $15566369 $18923489 $3357120 823

Wisconsin $96737081 $100294768 $3557687 965

Wyoming $7914035 $11556643 $3642608 685

Total $2983360762 $4221152134 $1237791374 707

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

13

State

Beginning of year net

pension liability

Assumed rate of return

(weighted average

across plans)

Assumed interest due on 2018 beginning

of year debt

2018 normal costdagger

2018 total expected

costDagger

2018 employee

contributions with interest

2018 employer

contribution benchmarksect

2018 actual employer

contributions with interest

Percent of employer

benchmark paid

Net amortization||

Alabama $15251096 775 $1181960 $954407 $2136367 $767179 $1369188 $1293504 94 -$75684

Alaska $7243003 800 $579497 $242840 $822336 $128306 $694030 $556411 80 -$137619

Arizona $27416368 774 $2122280 $1825501 $3947780 $1347511 $2600269 $2162496 83 -$437773

Arkansas $7853261 710 $557951 $534527 $1092478 $219977 $872501 $776295 89 -$96206

California $191130787 707 $13503891 $14100694 $27604585 $6762629 $20841956 $24116619 116 $3274664

Colorado $54596452 485 $2648807 $2185834 $4834641 $819995 $4014647 $1903073 47 -$2111573

Connecticut $34811035 733 $2550487 $905880 $3456367 $526637 $2929730 $2840519 97 -$89212

Delaware $1961753 631 $123883 $236947 $360830 $79153 $281677 $280407 100 -$1271

Florida $40281942 617 $2483643 $2682437 $5166080 $772653 $4393427 $3501282 80 -$892145

Georgia $22889927 749 $1714408 $1674041 $3388449 $826840 $2561609 $2857440 112 $295831

Hawaii $12950306 700 $906521 $584470 $1490992 $268354 $1222637 $876760 72 -$345878

Idaho $1506653 710 $106972 $440220 $547193 $253207 $293986 $394422 134 $100436

Illinois $136881554 696 $9523705 $3351603 $12875308 $1541872 $11333437 $8143193 72 -$3190244

Indiana $17326203 675 $1169519 $602253 $1771772 $62405 $1709366 $1989838 116 $280471

Iowa $6840464 701 $479728 $881056 $1360783 $505976 $854807 $777309 91 -$77498

Kansas $9128629 775 $707469 $552423 $1259892 $436267 $823625 $921493 112 $97868

Appendix C Net amortization details 2018In thousands

Continued on next page

14

Kentucky $42916062 457 $1962340 $1344834 $3307174 $459624 $2847550 $1885289 66 -$962261

Louisiana $18214179 767 $1396832 $754930 $2151762 $599520 $1552242 $2117818 136 $565576

Maine $2995575 688 $205946 $293786 $499732 $196064 $303668 $411397 135 $107728

Maryland $22584000 736 $1663262 $1358213 $3021475 $824117 $2197359 $2110351 96 -$87008

Massachusetts $35710159 750 $2678262 $1757434 $4435696 $1406338 $3029358 $2674071 88 -$355287

Michigan $32483291 749 $2432624 $850399 $3283024 $448739 $2834285 $3675705 130 $841420

Minnesota $37198871 570 $2118482 $2394914 $4513396 $1140576 $3372821 $1399477 41 -$1973343

Mississippi $16783124 775 $1300692 $710195 $2010887 $595085 $1415802 $1073116 76 -$342685

Missouri $15774044 758 $1196427 $1233899 $2430326 $931469 $1498857 $1582607 106 $83750

Montana $4080482 769 $313807 $257534 $571341 $211668 $359673 $362690 101 $3017

Nebraska $1474474 804 $118563 $361308 $479872 $249491 $230380 $320606 139 $90225

Nevada $13319492 750 $998962 $1138361 $2137323 $1024105 $1113217 $970167 87 -$143051

New Hampshire $4965063 725 $359849 $273264 $633113 $226092 $407022 $444277 109 $37255

New Jersey $142288433 741 $10539842 $4970779 $15510621 $2168820 $13341800 $4691558 35 -$8650242

New Mexico $16485691 641 $1056961 $879231 $1936192 $591229 $1344963 $738207 55 -$606756

New York $11468876 700 $802821 $3678776 $4481597 $361411 $4120187 $4989268 121 $869081

North Carolina $9631900 721 $694086 $2370680 $3064766 $1383612 $1681154 $2207884 131 $526731

North Dakota $2987137 706 $210885 $244878 $455763 $164401 $291362 $198577 68 -$92785

Ohio $39735633 735 $2920649 $3071713 $5992362 $3055314 $2937048 $3748626 128 $811578

Oklahoma $8548375 747 $638452 $763718 $1402170 $456570 $945600 $1326526 140 $380926

Oregon $13480000 720 $970560 $1108200 $2078760 $13046 $2065714 $1439274 70 -$626440

Continued on next page

15

Note Numbers may not be exact due to rounding

The assumed rate of return is weighted for the plans in each state by the net pension liability at the beginning of 2018

dagger The normal cost refers to the cost of benefits earned by employees in any given year Also called the service cost

Dagger The total expected cost represents the projected increase in the funding gap before taking employer and employee contributions into account It is equal to the normal cost plus the assumed interest on the unfunded liability

sect The employer contribution benchmark is the contribution level employers need to meet in order to keep pension debt from growing

|| For net amortization positive numbers mean expected progress in paying down pension debt Negative numbers mean expected growth in pension debt

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Pennsylvania $66328481 725 $4808815 $2855906 $7664721 $1470963 $6193758 $6522941 105 $329183

Rhode Island $5454061 700 $381784 $152862 $534646 $96362 $438285 $433127 99 -$5157

South Carolina $25482182 725 $1847458 $1103205 $2950663 $1046631 $1904033 $1710476 90 -$193557

South Dakota -$9075 650 -$590 $222710 $222120 $128237 $93882 $128724 137 $34842

Tennessee $1695312 731 $123939 $853550 $977488 $348831 $628657 $1141243 182 $512586

Texas $55145722 687 $3787172 $6196686 $9983858 $4210268 $5773590 $4280858 74 -$1492733

Utah $3420315 695 $237712 $642590 $880302 $37553 $842749 $1177968 140 $335219

Vermont $2283896 793 $181025 $118295 $299320 $101237 $198082 $199899 101 $1816

Virginia $21480408 700 $1503629 $1888831 $3392460 $891439 $2501020 $2554085 102 $53065

Washington $9883432 737 $728406 $1931582 $2659988 $1100150 $1559838 $2827714 181 $1267876

West Virginia $3917091 750 $293782 $281951 $575733 $164283 $411449 $678234 165 $266785

Wisconsin -$2969118 700 -$207838 $1860937 $1653099 $1006427 $646671 $1065965 165 $419294

Wyoming $2700673 671 $181154 $236862 $418016 $178956 $239060 $178228 75 -$60832

16

Appendix D Details of changes to net pension liability 2018In thousands

StateBeginning of year net

pension liability

End of year net pension

liabilityTotal changes

Net amortization benchmark

Employer + other

contributions

Net amortization

Change to reconcile

Investment experience

Benefit changes

Actuarial experience

Actuarial changes

Alabama $15251096 $15228842 -$22254 $1369188 $1293504 -$75684 -$97938 -$544500 $0 $177032 $269530

Alaska $7243003 $6929477 -$313526 $694030 $556411 -$137619 -$451145 -$17225 $0 -$433920 $0

Arizona $27416368 $25215806 -$2200562 $2600269 $2162496 -$437773 -$2638335 -$826137 -$116011 $515560 -$2211747

Arkansas $7853261 $6508389 -$1344872 $872501 $776295 -$96206 -$1441078 -$959873 $0 $34562 -$515767

California $191130787 $184852140 -$6278647 $20841956 $24116619 $3274664 -$3003983 -$3031295 $668 $2158587 -$2131943

Colorado $54596452 $31507099 -$23089353 $4014647 $1903073 -$2111573 -$25200926 $4206458 -$5980577 $889134 -$24315941

Connecticut $34811035 $35070959 $259924 $2929730 $2840519 -$89212 $170712 $74367 $510940 -$414595 $0

Delaware $1961753 $1761069 -$200684 $281677 $280407 -$1271 -$201955 -$285729 $11154 $89307 -$16687

Florida $40281942 $40704631 $422689 $4393427 $3501282 -$892145 -$469456 -$3049099 $0 $742984 $1836659

Georgia $22889927 $22930800 $40873 $2561609 $2857440 $295831 $336704 -$1164304 $72381 $1084627 $344000

Hawaii $12950306 $13318993 $368687 $1222637 $876760 -$345878 $22810 -$101944 $0 $124753 $0

Idaho $1506653 $1380532 -$126121 $293986 $394422 $100436 -$25684 -$167683 $83585 -$47697 $106111

Illinois $136881554 $140593161 $3711607 $11333437 $8143193 -$3190244 $521363 -$797304 -$374603 $731439 $961832

Indiana $17326203 $14571271 -$2754932 $1709366 $1989838 $280471 -$2474461 -$619782 $0 -$169086 -$1685593

Iowa $6840464 $6481626 -$358838 $854807 $777309 -$77498 -$436336 -$363061 -$1208 -$140228 $68161

Kansas $9128629 $8900507 -$228122 $823625 $921493 $97868 -$130254 -$83111 $0 -$47143 $0

Kentucky $42916062 $28603539 -$14312523 $2847550 $1885289 -$962261 -$15274784 -$1098415 $10513 -$19567 -$14167315

Louisiana $18214179 $17591031 -$623148 $1552242 $2117818 $565576 -$57572 -$696779 $658 -$195920 $834469

Continued on next page

17

Maine $2995575 $2665535 -$330041 $303668 $411397 $107728 -$222312 -$391240 -$106123 $35815 $239236

Maryland $22584000 $21954935 -$629065 $2197359 $2110351 -$87008 -$716073 -$185256 $5505 -$653748 $117426

Massachusetts $35710159 $36941268 $1231109 $3029358 $2674071 -$355287 $875822 -$785503 $0 $194325 $1467000

Michigan $32483291 $37602953 $5119662 $2834285 $3675705 $841420 $5961081 -$2089131 $0 -$64336 $8114548

Minnesota $37198871 $15188717 -$22010154 $3372821 $1399477 -$1973343 -$23983497 -$2573005 -$5765677 $1583 -$15646398

Mississippi $16783124 $16809495 $26371 $1415802 $1073116 -$342685 -$316314 -$354928 $0 $38614 $0

Missouri $15774044 $16635515 $861471 $1498857 $1582607 $83750 $945221 -$404892 -$8 -$7407 $1357528

Montana $4080482 $4381723 $301241 $359673 $362690 $3017 $304258 -$109601 $0 $207538 $206321

Nebraska $1474474 $1526977 $52503 $230380 $320606 $90225 $142728 $119428 $88636 -$65335 $0

Nevada $13319492 $13651509 $332017 $1113217 $970167 -$143051 $188966 -$315116 $0 $504082 $0

New Hampshire

$4965063 $4852683 -$112380 $407022 $444277 $37255 -$75125 -$108669 $0 $29109 $4435

New Jersey $142288433 $130717090 -$11571343 $13341800 $4691558 -$8650242 -$20221585 -$6169156 $0 $850491 -$14902920

New Mexico $16485691 $18166479 $1680788 $1344963 $738207 -$606756 $1074032 -$58134 $0 -$74477 $1206643

New York $11468876 $4238202 -$7230674 $4120187 $4989268 $869081 -$6361593 -$7838038 $0 $1476445 $0

North Carolina $9631900 $12509924 $2878024 $1681154 $2207884 $526731 $3404755 -$100834 $44793 $1199449 $2261347

North Dakota $2987137 $3030258 $43121 $291362 $198577 -$92785 -$49665 -$86485 $0 -$94216 $131036

Ohio $39735633 $50018612 $10282979 $2937048 $3748626 $811578 $11094557 $7711615 $0 -$307530 $3690472

Oklahoma $8548375 $7397822 -$1150553 $945600 $1326526 $380926 -$769626 -$575769 -$113763 -$105401 $25307

Oregon $13480000 $15148600 $1668600 $2065714 $1439274 -$626440 $1042160 -$1272440 $0 $74300 $2240300

Pennsylvania $66328481 $68835965 $2507484 $6193758 $6522941 $329183 $2836667 $3414973 $0 -$578306 $0

Rhode Island $5454061 $5481096 $27035 $438285 $433127 -$5157 $21877 -$50633 $0 $72627 -$116

South Carolina $25482182 $25465724 -$16458 $1904033 $1710476 -$193557 -$210015 -$136380 $0 -$73635 $0

Continued on next page

18

Sources Comprehensive annual financial reports actuarial reports and valuations or other public documents or as provided by plan

copy 2020 The Pew Charitable Trusts

Appendix E Debt driversStatesrsquo improved fiscal position in 2018 was driven by strong investment returnsmdash86 for those reporting on a fiscal year ending June 30mdashthat exceeded plan assumptions On their own investment returns lowered the cumulative funding gap by more than $10 billion although this reduction was offset by insufficient contributions Average performance through the following fiscal year ending June 30 2019 was under 710 Economic conditions in the third quarter of fiscal year 2020 point to a shortfall in meeting investment targets and an increase in unfunded liabilities of up to $500 billion nine months through the fiscal year

States cannot rely on investment income alone to chip away at their accumulated pension debt Pew has collected annual financial data on state-run pension systems since before the recession But even after a decade of economic recovery states have made limited progress in paying down pension debt In fact since 2007 the shortfall between actual contributions to state pension plans and minimum actuarial funding standards was $200 billion11

Changes to plan assumptions also decreased reported liabilities by $30 billion in 2018 however that result is driven by Colorado Kentucky Minnesota and New Jersey where improvements in funded status allowed plans to substantially increase their discount rates The remaining 46 states reported an increase in liabilities of $39 billion from assumption changes

South Dakota -$9075 -$2332 $6743 $93882 $128724 $34842 $41585 -$145567 $0 $5221 $181932

Tennessee $1695312 $1139335 -$555977 $628657 $1141243 $512586 -$43391 -$606253 $17316 -$32315 $577861

Texas $55145722 $76472542 $21326821 $5773590 $4280858 -$1492733 $19834088 -$274164 $2825 $68677 $20036750

Utah $3420315 $5448659 $2028344 $842749 $1177968 $335219 $2363563 $2338849 $0 $24714 $0

Vermont $2283896 $2418440 $134544 $198082 $199899 $1816 $136361 $12217 $194 $156907 -$32957

Virginia $21480408 $20337887 -$1142521 $2501020 $2554085 $53065 -$1089456 -$240348 $10811 -$859919 $0

Washington $9883432 $6048473 -$3834959 $1559838 $2827714 $1267876 -$2567083 -$1546224 $175100 -$118086 -$1077873

West Virginia $3917091 $3357120 -$559971 $411449 $678234 $266785 -$293186 -$279644 $0 -$14504 $962

Wisconsin -$2969118 $3557687 $6526805 $646671 $1065965 $419294 $6946099 $11552920 $0 -$4968302 $361481

Wyoming $2700673 $3642608 $941935 $239060 $178228 -$60832 $881102 $882867 $0 -$67752 $65987

Total $1276007674 $1237791374 -$38216300 $126118030 $114658013 -$11460017 -$49676317 -$10189958 -$11422892 $1934455 -$29997922

19

Change in Pension DebtStrong investment performance and changes in assumptions reduced reported pension debt by $10 billion and $30 billion respectively

Source Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Appendix F Net amortization benchmarkThe benchmark is calculated by taking the sum of service cost (the actuarial value of the benefits earned in 2018 also called normal cost) and interest on the net pension liability at the beginning of the year (each pension planrsquos total pension liability and the net pension liability both grow annually at the planrsquos assumed rate of return) and subtracting employee contributions Employer and employee contributions are adjusted to reflect expected interest After subtracting the $43 billion contributed by workers nationwide in 2018 (including interest) employers would have needed to contribute $126 billion to meet the net amortization benchmark to keep pension debt from growing To actually make progress on closing the funding gap states would have to exceed the contribution benchmark on a consistent basis

In b

illio

ns

$0

$200

$400

$600

$800

$1000

$1200

$1400

2018 netpension liability

Other factorsNetamortization

Changes inassumptions

Investmentgains

2017 netpension liability

$1276 -$10 -$30 -$9$11 $1238

For further information please visit pewtrustsorgpensions

Contact Sarah Jones communications officer Email sjonespewtrustsorg Project website pewtrustsorgpensions

The Pew Charitable Trusts is driven by the power of knowledge to solve todayrsquos most challenging problems Pew applies a rigorous analytical approach to improve public policy inform the public and invigorate civic life

Endnotes1 See Appendix F for more information on the net amortization benchmark

2 For example the US experienced annual gross domestic product (GDP) growth of more than 55 from 1988 through 2007 while the Congressional Budget Office now projects only 4 annual growth for the next decade See Congressional Budget Office ldquoThe Budget and Economic Outlook 2019 to 2029rdquo (2019) httpswwwcbogovsstemfiles2019-0354918-Outlook-3pdf

3 See SEBAC 2017 Agreement httpaftctorgsitesaftctorgfilessebac_2017_ta_signedpdf for details on Connecticut State Employees Retirement System (SERS) pension reforms

4 See Fitch Ratings ldquoConnecticut Teacher Pension Changes Costly but Lower Fiscal Risksrdquo Feb 28 2019 httpswwwfitchratingscomsitepr10064878

5 National Association of State Retirement Administrators ldquoNASRA Issue Brief Public Pension Plan Investment Return Assumptionsrdquo (updated April 2014) httpwwwnasraorgfilesIssue20BriefsNASRAInvReturnAssumptBriefpdf

6 Low return scenario assumes a 5 return

7 K Brainard and A Brown ldquoIn-Depth Risk Sharing in Public Retirement Plansrdquo (National Association of State Retirement Administrators 2018)

8 GASB Statement 67 on Financial Reporting for Pension Plans does also require an adjustment to the discount rate assumptionsmdashresulting in a higher reported pension liabilitymdashif current contribution policies are deemed insufficient However as of 2018 reporting only nine of the largest 100 plans across the 50 states are required to make this adjustment down from 15 in 2017

9 The Pew Charitable Trusts ldquoFoundation for Public Pensions Risk Reportingrdquo (2018) httpswwwhksharvardedusitesdefaultfilescentersmrcbgprogramsFoundation20for20Pensions20Risk20Reporting20(Strawman)pdf

10 Wilshire Trust Universe Comparison Service and Wilshire TUCS are service marks of Wilshire Associates Inc (ldquoWilshirerdquo) and have been licensed for use by The Pew Charitable Trusts All content of Wilshire TUCS is copyright 2019 Wilshire Associates Inc all rights reserved

11 Accounting standards changed in 2014 From 2007 to 2013 the shortfall is calculated between the actuarial recommended contribution and actual employer contributions From 2014 to 2018 the shortfall represents the gap between the net amortization benchmark and employer contributions

12

Mississippi $28135395 $44944890 $16809495 626

Missouri $58211187 $74846702 $16635515 778

Montana $11584819 $15966542 $4381723 726

Nebraska $14256785 $15783762 $1526977 903

Nevada $41560782 $55212291 $13651509 753

New Hampshire $8894798 $13747481 $4852683 647

New Jersey $81526803 $212243893 $130717090 384

New Mexico $28373494 $46539973 $18166479 610

New York $212076811 $216315013 $4238202 980

North Carolina $97635765 $110145689 $12509924 886

North Dakota $5675354 $8705612 $3030258 652

Ohio $157058983 $207077595 $50018612 758

Oklahoma $32237217 $39635039 $7397822 813

Oregon $69327500 $84476100 $15148600 821

Pennsylvania $83300714 $152136679 $68835965 548

Rhode Island $6485178 $11966274 $5481096 542

South Carolina $31207104 $56672828 $25465724 551

South Dakota $12235719 $12233387 -$2332 1000

Tennessee $48996019 $50135354 $1139335 977

Texas $183858309 $260330851 $76472542 706

Utah $31259522 $36708181 $5448659 852

Vermont $4341722 $6760162 $2418440 642

Virginia $76555264 $96893151 $20337887 790

Washington $92610488 $98658961 $6048473 939

West Virginia $15566369 $18923489 $3357120 823

Wisconsin $96737081 $100294768 $3557687 965

Wyoming $7914035 $11556643 $3642608 685

Total $2983360762 $4221152134 $1237791374 707

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

13

State

Beginning of year net

pension liability

Assumed rate of return

(weighted average

across plans)

Assumed interest due on 2018 beginning

of year debt

2018 normal costdagger

2018 total expected

costDagger

2018 employee

contributions with interest

2018 employer

contribution benchmarksect

2018 actual employer

contributions with interest

Percent of employer

benchmark paid

Net amortization||

Alabama $15251096 775 $1181960 $954407 $2136367 $767179 $1369188 $1293504 94 -$75684

Alaska $7243003 800 $579497 $242840 $822336 $128306 $694030 $556411 80 -$137619

Arizona $27416368 774 $2122280 $1825501 $3947780 $1347511 $2600269 $2162496 83 -$437773

Arkansas $7853261 710 $557951 $534527 $1092478 $219977 $872501 $776295 89 -$96206

California $191130787 707 $13503891 $14100694 $27604585 $6762629 $20841956 $24116619 116 $3274664

Colorado $54596452 485 $2648807 $2185834 $4834641 $819995 $4014647 $1903073 47 -$2111573

Connecticut $34811035 733 $2550487 $905880 $3456367 $526637 $2929730 $2840519 97 -$89212

Delaware $1961753 631 $123883 $236947 $360830 $79153 $281677 $280407 100 -$1271

Florida $40281942 617 $2483643 $2682437 $5166080 $772653 $4393427 $3501282 80 -$892145

Georgia $22889927 749 $1714408 $1674041 $3388449 $826840 $2561609 $2857440 112 $295831

Hawaii $12950306 700 $906521 $584470 $1490992 $268354 $1222637 $876760 72 -$345878

Idaho $1506653 710 $106972 $440220 $547193 $253207 $293986 $394422 134 $100436

Illinois $136881554 696 $9523705 $3351603 $12875308 $1541872 $11333437 $8143193 72 -$3190244

Indiana $17326203 675 $1169519 $602253 $1771772 $62405 $1709366 $1989838 116 $280471

Iowa $6840464 701 $479728 $881056 $1360783 $505976 $854807 $777309 91 -$77498

Kansas $9128629 775 $707469 $552423 $1259892 $436267 $823625 $921493 112 $97868

Appendix C Net amortization details 2018In thousands

Continued on next page

14

Kentucky $42916062 457 $1962340 $1344834 $3307174 $459624 $2847550 $1885289 66 -$962261

Louisiana $18214179 767 $1396832 $754930 $2151762 $599520 $1552242 $2117818 136 $565576

Maine $2995575 688 $205946 $293786 $499732 $196064 $303668 $411397 135 $107728

Maryland $22584000 736 $1663262 $1358213 $3021475 $824117 $2197359 $2110351 96 -$87008

Massachusetts $35710159 750 $2678262 $1757434 $4435696 $1406338 $3029358 $2674071 88 -$355287

Michigan $32483291 749 $2432624 $850399 $3283024 $448739 $2834285 $3675705 130 $841420

Minnesota $37198871 570 $2118482 $2394914 $4513396 $1140576 $3372821 $1399477 41 -$1973343

Mississippi $16783124 775 $1300692 $710195 $2010887 $595085 $1415802 $1073116 76 -$342685

Missouri $15774044 758 $1196427 $1233899 $2430326 $931469 $1498857 $1582607 106 $83750

Montana $4080482 769 $313807 $257534 $571341 $211668 $359673 $362690 101 $3017

Nebraska $1474474 804 $118563 $361308 $479872 $249491 $230380 $320606 139 $90225

Nevada $13319492 750 $998962 $1138361 $2137323 $1024105 $1113217 $970167 87 -$143051

New Hampshire $4965063 725 $359849 $273264 $633113 $226092 $407022 $444277 109 $37255

New Jersey $142288433 741 $10539842 $4970779 $15510621 $2168820 $13341800 $4691558 35 -$8650242

New Mexico $16485691 641 $1056961 $879231 $1936192 $591229 $1344963 $738207 55 -$606756

New York $11468876 700 $802821 $3678776 $4481597 $361411 $4120187 $4989268 121 $869081

North Carolina $9631900 721 $694086 $2370680 $3064766 $1383612 $1681154 $2207884 131 $526731

North Dakota $2987137 706 $210885 $244878 $455763 $164401 $291362 $198577 68 -$92785

Ohio $39735633 735 $2920649 $3071713 $5992362 $3055314 $2937048 $3748626 128 $811578

Oklahoma $8548375 747 $638452 $763718 $1402170 $456570 $945600 $1326526 140 $380926

Oregon $13480000 720 $970560 $1108200 $2078760 $13046 $2065714 $1439274 70 -$626440

Continued on next page

15

Note Numbers may not be exact due to rounding

The assumed rate of return is weighted for the plans in each state by the net pension liability at the beginning of 2018

dagger The normal cost refers to the cost of benefits earned by employees in any given year Also called the service cost

Dagger The total expected cost represents the projected increase in the funding gap before taking employer and employee contributions into account It is equal to the normal cost plus the assumed interest on the unfunded liability

sect The employer contribution benchmark is the contribution level employers need to meet in order to keep pension debt from growing

|| For net amortization positive numbers mean expected progress in paying down pension debt Negative numbers mean expected growth in pension debt

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Pennsylvania $66328481 725 $4808815 $2855906 $7664721 $1470963 $6193758 $6522941 105 $329183

Rhode Island $5454061 700 $381784 $152862 $534646 $96362 $438285 $433127 99 -$5157

South Carolina $25482182 725 $1847458 $1103205 $2950663 $1046631 $1904033 $1710476 90 -$193557

South Dakota -$9075 650 -$590 $222710 $222120 $128237 $93882 $128724 137 $34842

Tennessee $1695312 731 $123939 $853550 $977488 $348831 $628657 $1141243 182 $512586

Texas $55145722 687 $3787172 $6196686 $9983858 $4210268 $5773590 $4280858 74 -$1492733

Utah $3420315 695 $237712 $642590 $880302 $37553 $842749 $1177968 140 $335219

Vermont $2283896 793 $181025 $118295 $299320 $101237 $198082 $199899 101 $1816

Virginia $21480408 700 $1503629 $1888831 $3392460 $891439 $2501020 $2554085 102 $53065

Washington $9883432 737 $728406 $1931582 $2659988 $1100150 $1559838 $2827714 181 $1267876

West Virginia $3917091 750 $293782 $281951 $575733 $164283 $411449 $678234 165 $266785

Wisconsin -$2969118 700 -$207838 $1860937 $1653099 $1006427 $646671 $1065965 165 $419294

Wyoming $2700673 671 $181154 $236862 $418016 $178956 $239060 $178228 75 -$60832

16

Appendix D Details of changes to net pension liability 2018In thousands

StateBeginning of year net

pension liability

End of year net pension

liabilityTotal changes

Net amortization benchmark

Employer + other

contributions

Net amortization

Change to reconcile

Investment experience

Benefit changes

Actuarial experience

Actuarial changes

Alabama $15251096 $15228842 -$22254 $1369188 $1293504 -$75684 -$97938 -$544500 $0 $177032 $269530

Alaska $7243003 $6929477 -$313526 $694030 $556411 -$137619 -$451145 -$17225 $0 -$433920 $0

Arizona $27416368 $25215806 -$2200562 $2600269 $2162496 -$437773 -$2638335 -$826137 -$116011 $515560 -$2211747

Arkansas $7853261 $6508389 -$1344872 $872501 $776295 -$96206 -$1441078 -$959873 $0 $34562 -$515767

California $191130787 $184852140 -$6278647 $20841956 $24116619 $3274664 -$3003983 -$3031295 $668 $2158587 -$2131943

Colorado $54596452 $31507099 -$23089353 $4014647 $1903073 -$2111573 -$25200926 $4206458 -$5980577 $889134 -$24315941

Connecticut $34811035 $35070959 $259924 $2929730 $2840519 -$89212 $170712 $74367 $510940 -$414595 $0

Delaware $1961753 $1761069 -$200684 $281677 $280407 -$1271 -$201955 -$285729 $11154 $89307 -$16687

Florida $40281942 $40704631 $422689 $4393427 $3501282 -$892145 -$469456 -$3049099 $0 $742984 $1836659

Georgia $22889927 $22930800 $40873 $2561609 $2857440 $295831 $336704 -$1164304 $72381 $1084627 $344000

Hawaii $12950306 $13318993 $368687 $1222637 $876760 -$345878 $22810 -$101944 $0 $124753 $0

Idaho $1506653 $1380532 -$126121 $293986 $394422 $100436 -$25684 -$167683 $83585 -$47697 $106111

Illinois $136881554 $140593161 $3711607 $11333437 $8143193 -$3190244 $521363 -$797304 -$374603 $731439 $961832

Indiana $17326203 $14571271 -$2754932 $1709366 $1989838 $280471 -$2474461 -$619782 $0 -$169086 -$1685593

Iowa $6840464 $6481626 -$358838 $854807 $777309 -$77498 -$436336 -$363061 -$1208 -$140228 $68161

Kansas $9128629 $8900507 -$228122 $823625 $921493 $97868 -$130254 -$83111 $0 -$47143 $0

Kentucky $42916062 $28603539 -$14312523 $2847550 $1885289 -$962261 -$15274784 -$1098415 $10513 -$19567 -$14167315

Louisiana $18214179 $17591031 -$623148 $1552242 $2117818 $565576 -$57572 -$696779 $658 -$195920 $834469

Continued on next page

17

Maine $2995575 $2665535 -$330041 $303668 $411397 $107728 -$222312 -$391240 -$106123 $35815 $239236

Maryland $22584000 $21954935 -$629065 $2197359 $2110351 -$87008 -$716073 -$185256 $5505 -$653748 $117426

Massachusetts $35710159 $36941268 $1231109 $3029358 $2674071 -$355287 $875822 -$785503 $0 $194325 $1467000

Michigan $32483291 $37602953 $5119662 $2834285 $3675705 $841420 $5961081 -$2089131 $0 -$64336 $8114548

Minnesota $37198871 $15188717 -$22010154 $3372821 $1399477 -$1973343 -$23983497 -$2573005 -$5765677 $1583 -$15646398

Mississippi $16783124 $16809495 $26371 $1415802 $1073116 -$342685 -$316314 -$354928 $0 $38614 $0

Missouri $15774044 $16635515 $861471 $1498857 $1582607 $83750 $945221 -$404892 -$8 -$7407 $1357528

Montana $4080482 $4381723 $301241 $359673 $362690 $3017 $304258 -$109601 $0 $207538 $206321

Nebraska $1474474 $1526977 $52503 $230380 $320606 $90225 $142728 $119428 $88636 -$65335 $0

Nevada $13319492 $13651509 $332017 $1113217 $970167 -$143051 $188966 -$315116 $0 $504082 $0

New Hampshire

$4965063 $4852683 -$112380 $407022 $444277 $37255 -$75125 -$108669 $0 $29109 $4435

New Jersey $142288433 $130717090 -$11571343 $13341800 $4691558 -$8650242 -$20221585 -$6169156 $0 $850491 -$14902920

New Mexico $16485691 $18166479 $1680788 $1344963 $738207 -$606756 $1074032 -$58134 $0 -$74477 $1206643

New York $11468876 $4238202 -$7230674 $4120187 $4989268 $869081 -$6361593 -$7838038 $0 $1476445 $0

North Carolina $9631900 $12509924 $2878024 $1681154 $2207884 $526731 $3404755 -$100834 $44793 $1199449 $2261347

North Dakota $2987137 $3030258 $43121 $291362 $198577 -$92785 -$49665 -$86485 $0 -$94216 $131036

Ohio $39735633 $50018612 $10282979 $2937048 $3748626 $811578 $11094557 $7711615 $0 -$307530 $3690472

Oklahoma $8548375 $7397822 -$1150553 $945600 $1326526 $380926 -$769626 -$575769 -$113763 -$105401 $25307

Oregon $13480000 $15148600 $1668600 $2065714 $1439274 -$626440 $1042160 -$1272440 $0 $74300 $2240300

Pennsylvania $66328481 $68835965 $2507484 $6193758 $6522941 $329183 $2836667 $3414973 $0 -$578306 $0

Rhode Island $5454061 $5481096 $27035 $438285 $433127 -$5157 $21877 -$50633 $0 $72627 -$116

South Carolina $25482182 $25465724 -$16458 $1904033 $1710476 -$193557 -$210015 -$136380 $0 -$73635 $0

Continued on next page

18

Sources Comprehensive annual financial reports actuarial reports and valuations or other public documents or as provided by plan

copy 2020 The Pew Charitable Trusts

Appendix E Debt driversStatesrsquo improved fiscal position in 2018 was driven by strong investment returnsmdash86 for those reporting on a fiscal year ending June 30mdashthat exceeded plan assumptions On their own investment returns lowered the cumulative funding gap by more than $10 billion although this reduction was offset by insufficient contributions Average performance through the following fiscal year ending June 30 2019 was under 710 Economic conditions in the third quarter of fiscal year 2020 point to a shortfall in meeting investment targets and an increase in unfunded liabilities of up to $500 billion nine months through the fiscal year

States cannot rely on investment income alone to chip away at their accumulated pension debt Pew has collected annual financial data on state-run pension systems since before the recession But even after a decade of economic recovery states have made limited progress in paying down pension debt In fact since 2007 the shortfall between actual contributions to state pension plans and minimum actuarial funding standards was $200 billion11

Changes to plan assumptions also decreased reported liabilities by $30 billion in 2018 however that result is driven by Colorado Kentucky Minnesota and New Jersey where improvements in funded status allowed plans to substantially increase their discount rates The remaining 46 states reported an increase in liabilities of $39 billion from assumption changes

South Dakota -$9075 -$2332 $6743 $93882 $128724 $34842 $41585 -$145567 $0 $5221 $181932

Tennessee $1695312 $1139335 -$555977 $628657 $1141243 $512586 -$43391 -$606253 $17316 -$32315 $577861

Texas $55145722 $76472542 $21326821 $5773590 $4280858 -$1492733 $19834088 -$274164 $2825 $68677 $20036750

Utah $3420315 $5448659 $2028344 $842749 $1177968 $335219 $2363563 $2338849 $0 $24714 $0

Vermont $2283896 $2418440 $134544 $198082 $199899 $1816 $136361 $12217 $194 $156907 -$32957

Virginia $21480408 $20337887 -$1142521 $2501020 $2554085 $53065 -$1089456 -$240348 $10811 -$859919 $0

Washington $9883432 $6048473 -$3834959 $1559838 $2827714 $1267876 -$2567083 -$1546224 $175100 -$118086 -$1077873

West Virginia $3917091 $3357120 -$559971 $411449 $678234 $266785 -$293186 -$279644 $0 -$14504 $962

Wisconsin -$2969118 $3557687 $6526805 $646671 $1065965 $419294 $6946099 $11552920 $0 -$4968302 $361481

Wyoming $2700673 $3642608 $941935 $239060 $178228 -$60832 $881102 $882867 $0 -$67752 $65987

Total $1276007674 $1237791374 -$38216300 $126118030 $114658013 -$11460017 -$49676317 -$10189958 -$11422892 $1934455 -$29997922

19

Change in Pension DebtStrong investment performance and changes in assumptions reduced reported pension debt by $10 billion and $30 billion respectively

Source Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Appendix F Net amortization benchmarkThe benchmark is calculated by taking the sum of service cost (the actuarial value of the benefits earned in 2018 also called normal cost) and interest on the net pension liability at the beginning of the year (each pension planrsquos total pension liability and the net pension liability both grow annually at the planrsquos assumed rate of return) and subtracting employee contributions Employer and employee contributions are adjusted to reflect expected interest After subtracting the $43 billion contributed by workers nationwide in 2018 (including interest) employers would have needed to contribute $126 billion to meet the net amortization benchmark to keep pension debt from growing To actually make progress on closing the funding gap states would have to exceed the contribution benchmark on a consistent basis

In b

illio

ns

$0

$200

$400

$600

$800

$1000

$1200

$1400

2018 netpension liability

Other factorsNetamortization

Changes inassumptions

Investmentgains

2017 netpension liability

$1276 -$10 -$30 -$9$11 $1238

For further information please visit pewtrustsorgpensions

Contact Sarah Jones communications officer Email sjonespewtrustsorg Project website pewtrustsorgpensions

The Pew Charitable Trusts is driven by the power of knowledge to solve todayrsquos most challenging problems Pew applies a rigorous analytical approach to improve public policy inform the public and invigorate civic life

Endnotes1 See Appendix F for more information on the net amortization benchmark

2 For example the US experienced annual gross domestic product (GDP) growth of more than 55 from 1988 through 2007 while the Congressional Budget Office now projects only 4 annual growth for the next decade See Congressional Budget Office ldquoThe Budget and Economic Outlook 2019 to 2029rdquo (2019) httpswwwcbogovsstemfiles2019-0354918-Outlook-3pdf

3 See SEBAC 2017 Agreement httpaftctorgsitesaftctorgfilessebac_2017_ta_signedpdf for details on Connecticut State Employees Retirement System (SERS) pension reforms

4 See Fitch Ratings ldquoConnecticut Teacher Pension Changes Costly but Lower Fiscal Risksrdquo Feb 28 2019 httpswwwfitchratingscomsitepr10064878

5 National Association of State Retirement Administrators ldquoNASRA Issue Brief Public Pension Plan Investment Return Assumptionsrdquo (updated April 2014) httpwwwnasraorgfilesIssue20BriefsNASRAInvReturnAssumptBriefpdf

6 Low return scenario assumes a 5 return

7 K Brainard and A Brown ldquoIn-Depth Risk Sharing in Public Retirement Plansrdquo (National Association of State Retirement Administrators 2018)

8 GASB Statement 67 on Financial Reporting for Pension Plans does also require an adjustment to the discount rate assumptionsmdashresulting in a higher reported pension liabilitymdashif current contribution policies are deemed insufficient However as of 2018 reporting only nine of the largest 100 plans across the 50 states are required to make this adjustment down from 15 in 2017

9 The Pew Charitable Trusts ldquoFoundation for Public Pensions Risk Reportingrdquo (2018) httpswwwhksharvardedusitesdefaultfilescentersmrcbgprogramsFoundation20for20Pensions20Risk20Reporting20(Strawman)pdf

10 Wilshire Trust Universe Comparison Service and Wilshire TUCS are service marks of Wilshire Associates Inc (ldquoWilshirerdquo) and have been licensed for use by The Pew Charitable Trusts All content of Wilshire TUCS is copyright 2019 Wilshire Associates Inc all rights reserved

11 Accounting standards changed in 2014 From 2007 to 2013 the shortfall is calculated between the actuarial recommended contribution and actual employer contributions From 2014 to 2018 the shortfall represents the gap between the net amortization benchmark and employer contributions

13

State

Beginning of year net

pension liability

Assumed rate of return

(weighted average

across plans)

Assumed interest due on 2018 beginning

of year debt

2018 normal costdagger

2018 total expected

costDagger

2018 employee

contributions with interest

2018 employer

contribution benchmarksect

2018 actual employer

contributions with interest

Percent of employer

benchmark paid

Net amortization||

Alabama $15251096 775 $1181960 $954407 $2136367 $767179 $1369188 $1293504 94 -$75684

Alaska $7243003 800 $579497 $242840 $822336 $128306 $694030 $556411 80 -$137619

Arizona $27416368 774 $2122280 $1825501 $3947780 $1347511 $2600269 $2162496 83 -$437773

Arkansas $7853261 710 $557951 $534527 $1092478 $219977 $872501 $776295 89 -$96206

California $191130787 707 $13503891 $14100694 $27604585 $6762629 $20841956 $24116619 116 $3274664

Colorado $54596452 485 $2648807 $2185834 $4834641 $819995 $4014647 $1903073 47 -$2111573

Connecticut $34811035 733 $2550487 $905880 $3456367 $526637 $2929730 $2840519 97 -$89212

Delaware $1961753 631 $123883 $236947 $360830 $79153 $281677 $280407 100 -$1271

Florida $40281942 617 $2483643 $2682437 $5166080 $772653 $4393427 $3501282 80 -$892145

Georgia $22889927 749 $1714408 $1674041 $3388449 $826840 $2561609 $2857440 112 $295831

Hawaii $12950306 700 $906521 $584470 $1490992 $268354 $1222637 $876760 72 -$345878

Idaho $1506653 710 $106972 $440220 $547193 $253207 $293986 $394422 134 $100436

Illinois $136881554 696 $9523705 $3351603 $12875308 $1541872 $11333437 $8143193 72 -$3190244

Indiana $17326203 675 $1169519 $602253 $1771772 $62405 $1709366 $1989838 116 $280471

Iowa $6840464 701 $479728 $881056 $1360783 $505976 $854807 $777309 91 -$77498

Kansas $9128629 775 $707469 $552423 $1259892 $436267 $823625 $921493 112 $97868

Appendix C Net amortization details 2018In thousands

Continued on next page

14

Kentucky $42916062 457 $1962340 $1344834 $3307174 $459624 $2847550 $1885289 66 -$962261

Louisiana $18214179 767 $1396832 $754930 $2151762 $599520 $1552242 $2117818 136 $565576

Maine $2995575 688 $205946 $293786 $499732 $196064 $303668 $411397 135 $107728

Maryland $22584000 736 $1663262 $1358213 $3021475 $824117 $2197359 $2110351 96 -$87008

Massachusetts $35710159 750 $2678262 $1757434 $4435696 $1406338 $3029358 $2674071 88 -$355287

Michigan $32483291 749 $2432624 $850399 $3283024 $448739 $2834285 $3675705 130 $841420

Minnesota $37198871 570 $2118482 $2394914 $4513396 $1140576 $3372821 $1399477 41 -$1973343

Mississippi $16783124 775 $1300692 $710195 $2010887 $595085 $1415802 $1073116 76 -$342685

Missouri $15774044 758 $1196427 $1233899 $2430326 $931469 $1498857 $1582607 106 $83750

Montana $4080482 769 $313807 $257534 $571341 $211668 $359673 $362690 101 $3017

Nebraska $1474474 804 $118563 $361308 $479872 $249491 $230380 $320606 139 $90225

Nevada $13319492 750 $998962 $1138361 $2137323 $1024105 $1113217 $970167 87 -$143051

New Hampshire $4965063 725 $359849 $273264 $633113 $226092 $407022 $444277 109 $37255

New Jersey $142288433 741 $10539842 $4970779 $15510621 $2168820 $13341800 $4691558 35 -$8650242

New Mexico $16485691 641 $1056961 $879231 $1936192 $591229 $1344963 $738207 55 -$606756

New York $11468876 700 $802821 $3678776 $4481597 $361411 $4120187 $4989268 121 $869081

North Carolina $9631900 721 $694086 $2370680 $3064766 $1383612 $1681154 $2207884 131 $526731

North Dakota $2987137 706 $210885 $244878 $455763 $164401 $291362 $198577 68 -$92785

Ohio $39735633 735 $2920649 $3071713 $5992362 $3055314 $2937048 $3748626 128 $811578

Oklahoma $8548375 747 $638452 $763718 $1402170 $456570 $945600 $1326526 140 $380926

Oregon $13480000 720 $970560 $1108200 $2078760 $13046 $2065714 $1439274 70 -$626440

Continued on next page

15

Note Numbers may not be exact due to rounding

The assumed rate of return is weighted for the plans in each state by the net pension liability at the beginning of 2018

dagger The normal cost refers to the cost of benefits earned by employees in any given year Also called the service cost

Dagger The total expected cost represents the projected increase in the funding gap before taking employer and employee contributions into account It is equal to the normal cost plus the assumed interest on the unfunded liability

sect The employer contribution benchmark is the contribution level employers need to meet in order to keep pension debt from growing

|| For net amortization positive numbers mean expected progress in paying down pension debt Negative numbers mean expected growth in pension debt

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Pennsylvania $66328481 725 $4808815 $2855906 $7664721 $1470963 $6193758 $6522941 105 $329183

Rhode Island $5454061 700 $381784 $152862 $534646 $96362 $438285 $433127 99 -$5157

South Carolina $25482182 725 $1847458 $1103205 $2950663 $1046631 $1904033 $1710476 90 -$193557

South Dakota -$9075 650 -$590 $222710 $222120 $128237 $93882 $128724 137 $34842

Tennessee $1695312 731 $123939 $853550 $977488 $348831 $628657 $1141243 182 $512586

Texas $55145722 687 $3787172 $6196686 $9983858 $4210268 $5773590 $4280858 74 -$1492733

Utah $3420315 695 $237712 $642590 $880302 $37553 $842749 $1177968 140 $335219

Vermont $2283896 793 $181025 $118295 $299320 $101237 $198082 $199899 101 $1816

Virginia $21480408 700 $1503629 $1888831 $3392460 $891439 $2501020 $2554085 102 $53065

Washington $9883432 737 $728406 $1931582 $2659988 $1100150 $1559838 $2827714 181 $1267876

West Virginia $3917091 750 $293782 $281951 $575733 $164283 $411449 $678234 165 $266785

Wisconsin -$2969118 700 -$207838 $1860937 $1653099 $1006427 $646671 $1065965 165 $419294

Wyoming $2700673 671 $181154 $236862 $418016 $178956 $239060 $178228 75 -$60832

16

Appendix D Details of changes to net pension liability 2018In thousands

StateBeginning of year net

pension liability

End of year net pension

liabilityTotal changes

Net amortization benchmark

Employer + other

contributions

Net amortization

Change to reconcile

Investment experience

Benefit changes

Actuarial experience

Actuarial changes

Alabama $15251096 $15228842 -$22254 $1369188 $1293504 -$75684 -$97938 -$544500 $0 $177032 $269530

Alaska $7243003 $6929477 -$313526 $694030 $556411 -$137619 -$451145 -$17225 $0 -$433920 $0

Arizona $27416368 $25215806 -$2200562 $2600269 $2162496 -$437773 -$2638335 -$826137 -$116011 $515560 -$2211747

Arkansas $7853261 $6508389 -$1344872 $872501 $776295 -$96206 -$1441078 -$959873 $0 $34562 -$515767

California $191130787 $184852140 -$6278647 $20841956 $24116619 $3274664 -$3003983 -$3031295 $668 $2158587 -$2131943

Colorado $54596452 $31507099 -$23089353 $4014647 $1903073 -$2111573 -$25200926 $4206458 -$5980577 $889134 -$24315941

Connecticut $34811035 $35070959 $259924 $2929730 $2840519 -$89212 $170712 $74367 $510940 -$414595 $0

Delaware $1961753 $1761069 -$200684 $281677 $280407 -$1271 -$201955 -$285729 $11154 $89307 -$16687

Florida $40281942 $40704631 $422689 $4393427 $3501282 -$892145 -$469456 -$3049099 $0 $742984 $1836659

Georgia $22889927 $22930800 $40873 $2561609 $2857440 $295831 $336704 -$1164304 $72381 $1084627 $344000

Hawaii $12950306 $13318993 $368687 $1222637 $876760 -$345878 $22810 -$101944 $0 $124753 $0

Idaho $1506653 $1380532 -$126121 $293986 $394422 $100436 -$25684 -$167683 $83585 -$47697 $106111

Illinois $136881554 $140593161 $3711607 $11333437 $8143193 -$3190244 $521363 -$797304 -$374603 $731439 $961832

Indiana $17326203 $14571271 -$2754932 $1709366 $1989838 $280471 -$2474461 -$619782 $0 -$169086 -$1685593

Iowa $6840464 $6481626 -$358838 $854807 $777309 -$77498 -$436336 -$363061 -$1208 -$140228 $68161

Kansas $9128629 $8900507 -$228122 $823625 $921493 $97868 -$130254 -$83111 $0 -$47143 $0

Kentucky $42916062 $28603539 -$14312523 $2847550 $1885289 -$962261 -$15274784 -$1098415 $10513 -$19567 -$14167315

Louisiana $18214179 $17591031 -$623148 $1552242 $2117818 $565576 -$57572 -$696779 $658 -$195920 $834469

Continued on next page

17

Maine $2995575 $2665535 -$330041 $303668 $411397 $107728 -$222312 -$391240 -$106123 $35815 $239236

Maryland $22584000 $21954935 -$629065 $2197359 $2110351 -$87008 -$716073 -$185256 $5505 -$653748 $117426

Massachusetts $35710159 $36941268 $1231109 $3029358 $2674071 -$355287 $875822 -$785503 $0 $194325 $1467000

Michigan $32483291 $37602953 $5119662 $2834285 $3675705 $841420 $5961081 -$2089131 $0 -$64336 $8114548

Minnesota $37198871 $15188717 -$22010154 $3372821 $1399477 -$1973343 -$23983497 -$2573005 -$5765677 $1583 -$15646398

Mississippi $16783124 $16809495 $26371 $1415802 $1073116 -$342685 -$316314 -$354928 $0 $38614 $0

Missouri $15774044 $16635515 $861471 $1498857 $1582607 $83750 $945221 -$404892 -$8 -$7407 $1357528

Montana $4080482 $4381723 $301241 $359673 $362690 $3017 $304258 -$109601 $0 $207538 $206321

Nebraska $1474474 $1526977 $52503 $230380 $320606 $90225 $142728 $119428 $88636 -$65335 $0

Nevada $13319492 $13651509 $332017 $1113217 $970167 -$143051 $188966 -$315116 $0 $504082 $0

New Hampshire

$4965063 $4852683 -$112380 $407022 $444277 $37255 -$75125 -$108669 $0 $29109 $4435

New Jersey $142288433 $130717090 -$11571343 $13341800 $4691558 -$8650242 -$20221585 -$6169156 $0 $850491 -$14902920

New Mexico $16485691 $18166479 $1680788 $1344963 $738207 -$606756 $1074032 -$58134 $0 -$74477 $1206643

New York $11468876 $4238202 -$7230674 $4120187 $4989268 $869081 -$6361593 -$7838038 $0 $1476445 $0

North Carolina $9631900 $12509924 $2878024 $1681154 $2207884 $526731 $3404755 -$100834 $44793 $1199449 $2261347

North Dakota $2987137 $3030258 $43121 $291362 $198577 -$92785 -$49665 -$86485 $0 -$94216 $131036

Ohio $39735633 $50018612 $10282979 $2937048 $3748626 $811578 $11094557 $7711615 $0 -$307530 $3690472

Oklahoma $8548375 $7397822 -$1150553 $945600 $1326526 $380926 -$769626 -$575769 -$113763 -$105401 $25307

Oregon $13480000 $15148600 $1668600 $2065714 $1439274 -$626440 $1042160 -$1272440 $0 $74300 $2240300

Pennsylvania $66328481 $68835965 $2507484 $6193758 $6522941 $329183 $2836667 $3414973 $0 -$578306 $0

Rhode Island $5454061 $5481096 $27035 $438285 $433127 -$5157 $21877 -$50633 $0 $72627 -$116

South Carolina $25482182 $25465724 -$16458 $1904033 $1710476 -$193557 -$210015 -$136380 $0 -$73635 $0

Continued on next page

18

Sources Comprehensive annual financial reports actuarial reports and valuations or other public documents or as provided by plan

copy 2020 The Pew Charitable Trusts

Appendix E Debt driversStatesrsquo improved fiscal position in 2018 was driven by strong investment returnsmdash86 for those reporting on a fiscal year ending June 30mdashthat exceeded plan assumptions On their own investment returns lowered the cumulative funding gap by more than $10 billion although this reduction was offset by insufficient contributions Average performance through the following fiscal year ending June 30 2019 was under 710 Economic conditions in the third quarter of fiscal year 2020 point to a shortfall in meeting investment targets and an increase in unfunded liabilities of up to $500 billion nine months through the fiscal year

States cannot rely on investment income alone to chip away at their accumulated pension debt Pew has collected annual financial data on state-run pension systems since before the recession But even after a decade of economic recovery states have made limited progress in paying down pension debt In fact since 2007 the shortfall between actual contributions to state pension plans and minimum actuarial funding standards was $200 billion11

Changes to plan assumptions also decreased reported liabilities by $30 billion in 2018 however that result is driven by Colorado Kentucky Minnesota and New Jersey where improvements in funded status allowed plans to substantially increase their discount rates The remaining 46 states reported an increase in liabilities of $39 billion from assumption changes

South Dakota -$9075 -$2332 $6743 $93882 $128724 $34842 $41585 -$145567 $0 $5221 $181932

Tennessee $1695312 $1139335 -$555977 $628657 $1141243 $512586 -$43391 -$606253 $17316 -$32315 $577861

Texas $55145722 $76472542 $21326821 $5773590 $4280858 -$1492733 $19834088 -$274164 $2825 $68677 $20036750

Utah $3420315 $5448659 $2028344 $842749 $1177968 $335219 $2363563 $2338849 $0 $24714 $0

Vermont $2283896 $2418440 $134544 $198082 $199899 $1816 $136361 $12217 $194 $156907 -$32957

Virginia $21480408 $20337887 -$1142521 $2501020 $2554085 $53065 -$1089456 -$240348 $10811 -$859919 $0

Washington $9883432 $6048473 -$3834959 $1559838 $2827714 $1267876 -$2567083 -$1546224 $175100 -$118086 -$1077873

West Virginia $3917091 $3357120 -$559971 $411449 $678234 $266785 -$293186 -$279644 $0 -$14504 $962

Wisconsin -$2969118 $3557687 $6526805 $646671 $1065965 $419294 $6946099 $11552920 $0 -$4968302 $361481

Wyoming $2700673 $3642608 $941935 $239060 $178228 -$60832 $881102 $882867 $0 -$67752 $65987

Total $1276007674 $1237791374 -$38216300 $126118030 $114658013 -$11460017 -$49676317 -$10189958 -$11422892 $1934455 -$29997922

19

Change in Pension DebtStrong investment performance and changes in assumptions reduced reported pension debt by $10 billion and $30 billion respectively

Source Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Appendix F Net amortization benchmarkThe benchmark is calculated by taking the sum of service cost (the actuarial value of the benefits earned in 2018 also called normal cost) and interest on the net pension liability at the beginning of the year (each pension planrsquos total pension liability and the net pension liability both grow annually at the planrsquos assumed rate of return) and subtracting employee contributions Employer and employee contributions are adjusted to reflect expected interest After subtracting the $43 billion contributed by workers nationwide in 2018 (including interest) employers would have needed to contribute $126 billion to meet the net amortization benchmark to keep pension debt from growing To actually make progress on closing the funding gap states would have to exceed the contribution benchmark on a consistent basis

In b

illio

ns

$0

$200

$400

$600

$800

$1000

$1200

$1400

2018 netpension liability

Other factorsNetamortization

Changes inassumptions

Investmentgains

2017 netpension liability

$1276 -$10 -$30 -$9$11 $1238

For further information please visit pewtrustsorgpensions

Contact Sarah Jones communications officer Email sjonespewtrustsorg Project website pewtrustsorgpensions

The Pew Charitable Trusts is driven by the power of knowledge to solve todayrsquos most challenging problems Pew applies a rigorous analytical approach to improve public policy inform the public and invigorate civic life

Endnotes1 See Appendix F for more information on the net amortization benchmark

2 For example the US experienced annual gross domestic product (GDP) growth of more than 55 from 1988 through 2007 while the Congressional Budget Office now projects only 4 annual growth for the next decade See Congressional Budget Office ldquoThe Budget and Economic Outlook 2019 to 2029rdquo (2019) httpswwwcbogovsstemfiles2019-0354918-Outlook-3pdf

3 See SEBAC 2017 Agreement httpaftctorgsitesaftctorgfilessebac_2017_ta_signedpdf for details on Connecticut State Employees Retirement System (SERS) pension reforms

4 See Fitch Ratings ldquoConnecticut Teacher Pension Changes Costly but Lower Fiscal Risksrdquo Feb 28 2019 httpswwwfitchratingscomsitepr10064878

5 National Association of State Retirement Administrators ldquoNASRA Issue Brief Public Pension Plan Investment Return Assumptionsrdquo (updated April 2014) httpwwwnasraorgfilesIssue20BriefsNASRAInvReturnAssumptBriefpdf

6 Low return scenario assumes a 5 return

7 K Brainard and A Brown ldquoIn-Depth Risk Sharing in Public Retirement Plansrdquo (National Association of State Retirement Administrators 2018)

8 GASB Statement 67 on Financial Reporting for Pension Plans does also require an adjustment to the discount rate assumptionsmdashresulting in a higher reported pension liabilitymdashif current contribution policies are deemed insufficient However as of 2018 reporting only nine of the largest 100 plans across the 50 states are required to make this adjustment down from 15 in 2017

9 The Pew Charitable Trusts ldquoFoundation for Public Pensions Risk Reportingrdquo (2018) httpswwwhksharvardedusitesdefaultfilescentersmrcbgprogramsFoundation20for20Pensions20Risk20Reporting20(Strawman)pdf

10 Wilshire Trust Universe Comparison Service and Wilshire TUCS are service marks of Wilshire Associates Inc (ldquoWilshirerdquo) and have been licensed for use by The Pew Charitable Trusts All content of Wilshire TUCS is copyright 2019 Wilshire Associates Inc all rights reserved

11 Accounting standards changed in 2014 From 2007 to 2013 the shortfall is calculated between the actuarial recommended contribution and actual employer contributions From 2014 to 2018 the shortfall represents the gap between the net amortization benchmark and employer contributions

14

Kentucky $42916062 457 $1962340 $1344834 $3307174 $459624 $2847550 $1885289 66 -$962261

Louisiana $18214179 767 $1396832 $754930 $2151762 $599520 $1552242 $2117818 136 $565576

Maine $2995575 688 $205946 $293786 $499732 $196064 $303668 $411397 135 $107728

Maryland $22584000 736 $1663262 $1358213 $3021475 $824117 $2197359 $2110351 96 -$87008

Massachusetts $35710159 750 $2678262 $1757434 $4435696 $1406338 $3029358 $2674071 88 -$355287

Michigan $32483291 749 $2432624 $850399 $3283024 $448739 $2834285 $3675705 130 $841420

Minnesota $37198871 570 $2118482 $2394914 $4513396 $1140576 $3372821 $1399477 41 -$1973343

Mississippi $16783124 775 $1300692 $710195 $2010887 $595085 $1415802 $1073116 76 -$342685

Missouri $15774044 758 $1196427 $1233899 $2430326 $931469 $1498857 $1582607 106 $83750

Montana $4080482 769 $313807 $257534 $571341 $211668 $359673 $362690 101 $3017

Nebraska $1474474 804 $118563 $361308 $479872 $249491 $230380 $320606 139 $90225

Nevada $13319492 750 $998962 $1138361 $2137323 $1024105 $1113217 $970167 87 -$143051

New Hampshire $4965063 725 $359849 $273264 $633113 $226092 $407022 $444277 109 $37255

New Jersey $142288433 741 $10539842 $4970779 $15510621 $2168820 $13341800 $4691558 35 -$8650242

New Mexico $16485691 641 $1056961 $879231 $1936192 $591229 $1344963 $738207 55 -$606756

New York $11468876 700 $802821 $3678776 $4481597 $361411 $4120187 $4989268 121 $869081

North Carolina $9631900 721 $694086 $2370680 $3064766 $1383612 $1681154 $2207884 131 $526731

North Dakota $2987137 706 $210885 $244878 $455763 $164401 $291362 $198577 68 -$92785

Ohio $39735633 735 $2920649 $3071713 $5992362 $3055314 $2937048 $3748626 128 $811578

Oklahoma $8548375 747 $638452 $763718 $1402170 $456570 $945600 $1326526 140 $380926

Oregon $13480000 720 $970560 $1108200 $2078760 $13046 $2065714 $1439274 70 -$626440

Continued on next page

15

Note Numbers may not be exact due to rounding

The assumed rate of return is weighted for the plans in each state by the net pension liability at the beginning of 2018

dagger The normal cost refers to the cost of benefits earned by employees in any given year Also called the service cost

Dagger The total expected cost represents the projected increase in the funding gap before taking employer and employee contributions into account It is equal to the normal cost plus the assumed interest on the unfunded liability

sect The employer contribution benchmark is the contribution level employers need to meet in order to keep pension debt from growing

|| For net amortization positive numbers mean expected progress in paying down pension debt Negative numbers mean expected growth in pension debt

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Pennsylvania $66328481 725 $4808815 $2855906 $7664721 $1470963 $6193758 $6522941 105 $329183

Rhode Island $5454061 700 $381784 $152862 $534646 $96362 $438285 $433127 99 -$5157

South Carolina $25482182 725 $1847458 $1103205 $2950663 $1046631 $1904033 $1710476 90 -$193557

South Dakota -$9075 650 -$590 $222710 $222120 $128237 $93882 $128724 137 $34842

Tennessee $1695312 731 $123939 $853550 $977488 $348831 $628657 $1141243 182 $512586

Texas $55145722 687 $3787172 $6196686 $9983858 $4210268 $5773590 $4280858 74 -$1492733

Utah $3420315 695 $237712 $642590 $880302 $37553 $842749 $1177968 140 $335219

Vermont $2283896 793 $181025 $118295 $299320 $101237 $198082 $199899 101 $1816

Virginia $21480408 700 $1503629 $1888831 $3392460 $891439 $2501020 $2554085 102 $53065

Washington $9883432 737 $728406 $1931582 $2659988 $1100150 $1559838 $2827714 181 $1267876

West Virginia $3917091 750 $293782 $281951 $575733 $164283 $411449 $678234 165 $266785

Wisconsin -$2969118 700 -$207838 $1860937 $1653099 $1006427 $646671 $1065965 165 $419294

Wyoming $2700673 671 $181154 $236862 $418016 $178956 $239060 $178228 75 -$60832

16

Appendix D Details of changes to net pension liability 2018In thousands

StateBeginning of year net

pension liability

End of year net pension

liabilityTotal changes

Net amortization benchmark

Employer + other

contributions

Net amortization

Change to reconcile

Investment experience

Benefit changes

Actuarial experience

Actuarial changes

Alabama $15251096 $15228842 -$22254 $1369188 $1293504 -$75684 -$97938 -$544500 $0 $177032 $269530

Alaska $7243003 $6929477 -$313526 $694030 $556411 -$137619 -$451145 -$17225 $0 -$433920 $0

Arizona $27416368 $25215806 -$2200562 $2600269 $2162496 -$437773 -$2638335 -$826137 -$116011 $515560 -$2211747

Arkansas $7853261 $6508389 -$1344872 $872501 $776295 -$96206 -$1441078 -$959873 $0 $34562 -$515767

California $191130787 $184852140 -$6278647 $20841956 $24116619 $3274664 -$3003983 -$3031295 $668 $2158587 -$2131943

Colorado $54596452 $31507099 -$23089353 $4014647 $1903073 -$2111573 -$25200926 $4206458 -$5980577 $889134 -$24315941

Connecticut $34811035 $35070959 $259924 $2929730 $2840519 -$89212 $170712 $74367 $510940 -$414595 $0

Delaware $1961753 $1761069 -$200684 $281677 $280407 -$1271 -$201955 -$285729 $11154 $89307 -$16687

Florida $40281942 $40704631 $422689 $4393427 $3501282 -$892145 -$469456 -$3049099 $0 $742984 $1836659

Georgia $22889927 $22930800 $40873 $2561609 $2857440 $295831 $336704 -$1164304 $72381 $1084627 $344000

Hawaii $12950306 $13318993 $368687 $1222637 $876760 -$345878 $22810 -$101944 $0 $124753 $0

Idaho $1506653 $1380532 -$126121 $293986 $394422 $100436 -$25684 -$167683 $83585 -$47697 $106111

Illinois $136881554 $140593161 $3711607 $11333437 $8143193 -$3190244 $521363 -$797304 -$374603 $731439 $961832

Indiana $17326203 $14571271 -$2754932 $1709366 $1989838 $280471 -$2474461 -$619782 $0 -$169086 -$1685593

Iowa $6840464 $6481626 -$358838 $854807 $777309 -$77498 -$436336 -$363061 -$1208 -$140228 $68161

Kansas $9128629 $8900507 -$228122 $823625 $921493 $97868 -$130254 -$83111 $0 -$47143 $0

Kentucky $42916062 $28603539 -$14312523 $2847550 $1885289 -$962261 -$15274784 -$1098415 $10513 -$19567 -$14167315

Louisiana $18214179 $17591031 -$623148 $1552242 $2117818 $565576 -$57572 -$696779 $658 -$195920 $834469

Continued on next page

17

Maine $2995575 $2665535 -$330041 $303668 $411397 $107728 -$222312 -$391240 -$106123 $35815 $239236

Maryland $22584000 $21954935 -$629065 $2197359 $2110351 -$87008 -$716073 -$185256 $5505 -$653748 $117426

Massachusetts $35710159 $36941268 $1231109 $3029358 $2674071 -$355287 $875822 -$785503 $0 $194325 $1467000

Michigan $32483291 $37602953 $5119662 $2834285 $3675705 $841420 $5961081 -$2089131 $0 -$64336 $8114548

Minnesota $37198871 $15188717 -$22010154 $3372821 $1399477 -$1973343 -$23983497 -$2573005 -$5765677 $1583 -$15646398

Mississippi $16783124 $16809495 $26371 $1415802 $1073116 -$342685 -$316314 -$354928 $0 $38614 $0

Missouri $15774044 $16635515 $861471 $1498857 $1582607 $83750 $945221 -$404892 -$8 -$7407 $1357528

Montana $4080482 $4381723 $301241 $359673 $362690 $3017 $304258 -$109601 $0 $207538 $206321

Nebraska $1474474 $1526977 $52503 $230380 $320606 $90225 $142728 $119428 $88636 -$65335 $0

Nevada $13319492 $13651509 $332017 $1113217 $970167 -$143051 $188966 -$315116 $0 $504082 $0

New Hampshire

$4965063 $4852683 -$112380 $407022 $444277 $37255 -$75125 -$108669 $0 $29109 $4435

New Jersey $142288433 $130717090 -$11571343 $13341800 $4691558 -$8650242 -$20221585 -$6169156 $0 $850491 -$14902920

New Mexico $16485691 $18166479 $1680788 $1344963 $738207 -$606756 $1074032 -$58134 $0 -$74477 $1206643

New York $11468876 $4238202 -$7230674 $4120187 $4989268 $869081 -$6361593 -$7838038 $0 $1476445 $0

North Carolina $9631900 $12509924 $2878024 $1681154 $2207884 $526731 $3404755 -$100834 $44793 $1199449 $2261347

North Dakota $2987137 $3030258 $43121 $291362 $198577 -$92785 -$49665 -$86485 $0 -$94216 $131036

Ohio $39735633 $50018612 $10282979 $2937048 $3748626 $811578 $11094557 $7711615 $0 -$307530 $3690472

Oklahoma $8548375 $7397822 -$1150553 $945600 $1326526 $380926 -$769626 -$575769 -$113763 -$105401 $25307

Oregon $13480000 $15148600 $1668600 $2065714 $1439274 -$626440 $1042160 -$1272440 $0 $74300 $2240300

Pennsylvania $66328481 $68835965 $2507484 $6193758 $6522941 $329183 $2836667 $3414973 $0 -$578306 $0

Rhode Island $5454061 $5481096 $27035 $438285 $433127 -$5157 $21877 -$50633 $0 $72627 -$116

South Carolina $25482182 $25465724 -$16458 $1904033 $1710476 -$193557 -$210015 -$136380 $0 -$73635 $0

Continued on next page

18

Sources Comprehensive annual financial reports actuarial reports and valuations or other public documents or as provided by plan

copy 2020 The Pew Charitable Trusts

Appendix E Debt driversStatesrsquo improved fiscal position in 2018 was driven by strong investment returnsmdash86 for those reporting on a fiscal year ending June 30mdashthat exceeded plan assumptions On their own investment returns lowered the cumulative funding gap by more than $10 billion although this reduction was offset by insufficient contributions Average performance through the following fiscal year ending June 30 2019 was under 710 Economic conditions in the third quarter of fiscal year 2020 point to a shortfall in meeting investment targets and an increase in unfunded liabilities of up to $500 billion nine months through the fiscal year

States cannot rely on investment income alone to chip away at their accumulated pension debt Pew has collected annual financial data on state-run pension systems since before the recession But even after a decade of economic recovery states have made limited progress in paying down pension debt In fact since 2007 the shortfall between actual contributions to state pension plans and minimum actuarial funding standards was $200 billion11

Changes to plan assumptions also decreased reported liabilities by $30 billion in 2018 however that result is driven by Colorado Kentucky Minnesota and New Jersey where improvements in funded status allowed plans to substantially increase their discount rates The remaining 46 states reported an increase in liabilities of $39 billion from assumption changes

South Dakota -$9075 -$2332 $6743 $93882 $128724 $34842 $41585 -$145567 $0 $5221 $181932

Tennessee $1695312 $1139335 -$555977 $628657 $1141243 $512586 -$43391 -$606253 $17316 -$32315 $577861

Texas $55145722 $76472542 $21326821 $5773590 $4280858 -$1492733 $19834088 -$274164 $2825 $68677 $20036750

Utah $3420315 $5448659 $2028344 $842749 $1177968 $335219 $2363563 $2338849 $0 $24714 $0

Vermont $2283896 $2418440 $134544 $198082 $199899 $1816 $136361 $12217 $194 $156907 -$32957

Virginia $21480408 $20337887 -$1142521 $2501020 $2554085 $53065 -$1089456 -$240348 $10811 -$859919 $0

Washington $9883432 $6048473 -$3834959 $1559838 $2827714 $1267876 -$2567083 -$1546224 $175100 -$118086 -$1077873

West Virginia $3917091 $3357120 -$559971 $411449 $678234 $266785 -$293186 -$279644 $0 -$14504 $962

Wisconsin -$2969118 $3557687 $6526805 $646671 $1065965 $419294 $6946099 $11552920 $0 -$4968302 $361481

Wyoming $2700673 $3642608 $941935 $239060 $178228 -$60832 $881102 $882867 $0 -$67752 $65987

Total $1276007674 $1237791374 -$38216300 $126118030 $114658013 -$11460017 -$49676317 -$10189958 -$11422892 $1934455 -$29997922

19

Change in Pension DebtStrong investment performance and changes in assumptions reduced reported pension debt by $10 billion and $30 billion respectively

Source Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Appendix F Net amortization benchmarkThe benchmark is calculated by taking the sum of service cost (the actuarial value of the benefits earned in 2018 also called normal cost) and interest on the net pension liability at the beginning of the year (each pension planrsquos total pension liability and the net pension liability both grow annually at the planrsquos assumed rate of return) and subtracting employee contributions Employer and employee contributions are adjusted to reflect expected interest After subtracting the $43 billion contributed by workers nationwide in 2018 (including interest) employers would have needed to contribute $126 billion to meet the net amortization benchmark to keep pension debt from growing To actually make progress on closing the funding gap states would have to exceed the contribution benchmark on a consistent basis

In b

illio

ns

$0

$200

$400

$600

$800

$1000

$1200

$1400

2018 netpension liability

Other factorsNetamortization

Changes inassumptions

Investmentgains

2017 netpension liability

$1276 -$10 -$30 -$9$11 $1238

For further information please visit pewtrustsorgpensions

Contact Sarah Jones communications officer Email sjonespewtrustsorg Project website pewtrustsorgpensions

The Pew Charitable Trusts is driven by the power of knowledge to solve todayrsquos most challenging problems Pew applies a rigorous analytical approach to improve public policy inform the public and invigorate civic life

Endnotes1 See Appendix F for more information on the net amortization benchmark

2 For example the US experienced annual gross domestic product (GDP) growth of more than 55 from 1988 through 2007 while the Congressional Budget Office now projects only 4 annual growth for the next decade See Congressional Budget Office ldquoThe Budget and Economic Outlook 2019 to 2029rdquo (2019) httpswwwcbogovsstemfiles2019-0354918-Outlook-3pdf

3 See SEBAC 2017 Agreement httpaftctorgsitesaftctorgfilessebac_2017_ta_signedpdf for details on Connecticut State Employees Retirement System (SERS) pension reforms

4 See Fitch Ratings ldquoConnecticut Teacher Pension Changes Costly but Lower Fiscal Risksrdquo Feb 28 2019 httpswwwfitchratingscomsitepr10064878

5 National Association of State Retirement Administrators ldquoNASRA Issue Brief Public Pension Plan Investment Return Assumptionsrdquo (updated April 2014) httpwwwnasraorgfilesIssue20BriefsNASRAInvReturnAssumptBriefpdf

6 Low return scenario assumes a 5 return

7 K Brainard and A Brown ldquoIn-Depth Risk Sharing in Public Retirement Plansrdquo (National Association of State Retirement Administrators 2018)

8 GASB Statement 67 on Financial Reporting for Pension Plans does also require an adjustment to the discount rate assumptionsmdashresulting in a higher reported pension liabilitymdashif current contribution policies are deemed insufficient However as of 2018 reporting only nine of the largest 100 plans across the 50 states are required to make this adjustment down from 15 in 2017

9 The Pew Charitable Trusts ldquoFoundation for Public Pensions Risk Reportingrdquo (2018) httpswwwhksharvardedusitesdefaultfilescentersmrcbgprogramsFoundation20for20Pensions20Risk20Reporting20(Strawman)pdf

10 Wilshire Trust Universe Comparison Service and Wilshire TUCS are service marks of Wilshire Associates Inc (ldquoWilshirerdquo) and have been licensed for use by The Pew Charitable Trusts All content of Wilshire TUCS is copyright 2019 Wilshire Associates Inc all rights reserved

11 Accounting standards changed in 2014 From 2007 to 2013 the shortfall is calculated between the actuarial recommended contribution and actual employer contributions From 2014 to 2018 the shortfall represents the gap between the net amortization benchmark and employer contributions

15

Note Numbers may not be exact due to rounding

The assumed rate of return is weighted for the plans in each state by the net pension liability at the beginning of 2018

dagger The normal cost refers to the cost of benefits earned by employees in any given year Also called the service cost

Dagger The total expected cost represents the projected increase in the funding gap before taking employer and employee contributions into account It is equal to the normal cost plus the assumed interest on the unfunded liability

sect The employer contribution benchmark is the contribution level employers need to meet in order to keep pension debt from growing

|| For net amortization positive numbers mean expected progress in paying down pension debt Negative numbers mean expected growth in pension debt

Sources Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Pennsylvania $66328481 725 $4808815 $2855906 $7664721 $1470963 $6193758 $6522941 105 $329183

Rhode Island $5454061 700 $381784 $152862 $534646 $96362 $438285 $433127 99 -$5157

South Carolina $25482182 725 $1847458 $1103205 $2950663 $1046631 $1904033 $1710476 90 -$193557

South Dakota -$9075 650 -$590 $222710 $222120 $128237 $93882 $128724 137 $34842

Tennessee $1695312 731 $123939 $853550 $977488 $348831 $628657 $1141243 182 $512586

Texas $55145722 687 $3787172 $6196686 $9983858 $4210268 $5773590 $4280858 74 -$1492733

Utah $3420315 695 $237712 $642590 $880302 $37553 $842749 $1177968 140 $335219

Vermont $2283896 793 $181025 $118295 $299320 $101237 $198082 $199899 101 $1816

Virginia $21480408 700 $1503629 $1888831 $3392460 $891439 $2501020 $2554085 102 $53065

Washington $9883432 737 $728406 $1931582 $2659988 $1100150 $1559838 $2827714 181 $1267876

West Virginia $3917091 750 $293782 $281951 $575733 $164283 $411449 $678234 165 $266785

Wisconsin -$2969118 700 -$207838 $1860937 $1653099 $1006427 $646671 $1065965 165 $419294

Wyoming $2700673 671 $181154 $236862 $418016 $178956 $239060 $178228 75 -$60832

16

Appendix D Details of changes to net pension liability 2018In thousands

StateBeginning of year net

pension liability

End of year net pension

liabilityTotal changes

Net amortization benchmark

Employer + other

contributions

Net amortization

Change to reconcile

Investment experience

Benefit changes

Actuarial experience

Actuarial changes

Alabama $15251096 $15228842 -$22254 $1369188 $1293504 -$75684 -$97938 -$544500 $0 $177032 $269530

Alaska $7243003 $6929477 -$313526 $694030 $556411 -$137619 -$451145 -$17225 $0 -$433920 $0

Arizona $27416368 $25215806 -$2200562 $2600269 $2162496 -$437773 -$2638335 -$826137 -$116011 $515560 -$2211747

Arkansas $7853261 $6508389 -$1344872 $872501 $776295 -$96206 -$1441078 -$959873 $0 $34562 -$515767

California $191130787 $184852140 -$6278647 $20841956 $24116619 $3274664 -$3003983 -$3031295 $668 $2158587 -$2131943

Colorado $54596452 $31507099 -$23089353 $4014647 $1903073 -$2111573 -$25200926 $4206458 -$5980577 $889134 -$24315941

Connecticut $34811035 $35070959 $259924 $2929730 $2840519 -$89212 $170712 $74367 $510940 -$414595 $0

Delaware $1961753 $1761069 -$200684 $281677 $280407 -$1271 -$201955 -$285729 $11154 $89307 -$16687

Florida $40281942 $40704631 $422689 $4393427 $3501282 -$892145 -$469456 -$3049099 $0 $742984 $1836659

Georgia $22889927 $22930800 $40873 $2561609 $2857440 $295831 $336704 -$1164304 $72381 $1084627 $344000

Hawaii $12950306 $13318993 $368687 $1222637 $876760 -$345878 $22810 -$101944 $0 $124753 $0

Idaho $1506653 $1380532 -$126121 $293986 $394422 $100436 -$25684 -$167683 $83585 -$47697 $106111

Illinois $136881554 $140593161 $3711607 $11333437 $8143193 -$3190244 $521363 -$797304 -$374603 $731439 $961832

Indiana $17326203 $14571271 -$2754932 $1709366 $1989838 $280471 -$2474461 -$619782 $0 -$169086 -$1685593

Iowa $6840464 $6481626 -$358838 $854807 $777309 -$77498 -$436336 -$363061 -$1208 -$140228 $68161

Kansas $9128629 $8900507 -$228122 $823625 $921493 $97868 -$130254 -$83111 $0 -$47143 $0

Kentucky $42916062 $28603539 -$14312523 $2847550 $1885289 -$962261 -$15274784 -$1098415 $10513 -$19567 -$14167315

Louisiana $18214179 $17591031 -$623148 $1552242 $2117818 $565576 -$57572 -$696779 $658 -$195920 $834469

Continued on next page

17

Maine $2995575 $2665535 -$330041 $303668 $411397 $107728 -$222312 -$391240 -$106123 $35815 $239236

Maryland $22584000 $21954935 -$629065 $2197359 $2110351 -$87008 -$716073 -$185256 $5505 -$653748 $117426

Massachusetts $35710159 $36941268 $1231109 $3029358 $2674071 -$355287 $875822 -$785503 $0 $194325 $1467000

Michigan $32483291 $37602953 $5119662 $2834285 $3675705 $841420 $5961081 -$2089131 $0 -$64336 $8114548

Minnesota $37198871 $15188717 -$22010154 $3372821 $1399477 -$1973343 -$23983497 -$2573005 -$5765677 $1583 -$15646398

Mississippi $16783124 $16809495 $26371 $1415802 $1073116 -$342685 -$316314 -$354928 $0 $38614 $0

Missouri $15774044 $16635515 $861471 $1498857 $1582607 $83750 $945221 -$404892 -$8 -$7407 $1357528

Montana $4080482 $4381723 $301241 $359673 $362690 $3017 $304258 -$109601 $0 $207538 $206321

Nebraska $1474474 $1526977 $52503 $230380 $320606 $90225 $142728 $119428 $88636 -$65335 $0

Nevada $13319492 $13651509 $332017 $1113217 $970167 -$143051 $188966 -$315116 $0 $504082 $0

New Hampshire

$4965063 $4852683 -$112380 $407022 $444277 $37255 -$75125 -$108669 $0 $29109 $4435

New Jersey $142288433 $130717090 -$11571343 $13341800 $4691558 -$8650242 -$20221585 -$6169156 $0 $850491 -$14902920

New Mexico $16485691 $18166479 $1680788 $1344963 $738207 -$606756 $1074032 -$58134 $0 -$74477 $1206643

New York $11468876 $4238202 -$7230674 $4120187 $4989268 $869081 -$6361593 -$7838038 $0 $1476445 $0

North Carolina $9631900 $12509924 $2878024 $1681154 $2207884 $526731 $3404755 -$100834 $44793 $1199449 $2261347

North Dakota $2987137 $3030258 $43121 $291362 $198577 -$92785 -$49665 -$86485 $0 -$94216 $131036

Ohio $39735633 $50018612 $10282979 $2937048 $3748626 $811578 $11094557 $7711615 $0 -$307530 $3690472

Oklahoma $8548375 $7397822 -$1150553 $945600 $1326526 $380926 -$769626 -$575769 -$113763 -$105401 $25307

Oregon $13480000 $15148600 $1668600 $2065714 $1439274 -$626440 $1042160 -$1272440 $0 $74300 $2240300

Pennsylvania $66328481 $68835965 $2507484 $6193758 $6522941 $329183 $2836667 $3414973 $0 -$578306 $0

Rhode Island $5454061 $5481096 $27035 $438285 $433127 -$5157 $21877 -$50633 $0 $72627 -$116

South Carolina $25482182 $25465724 -$16458 $1904033 $1710476 -$193557 -$210015 -$136380 $0 -$73635 $0

Continued on next page

18

Sources Comprehensive annual financial reports actuarial reports and valuations or other public documents or as provided by plan

copy 2020 The Pew Charitable Trusts

Appendix E Debt driversStatesrsquo improved fiscal position in 2018 was driven by strong investment returnsmdash86 for those reporting on a fiscal year ending June 30mdashthat exceeded plan assumptions On their own investment returns lowered the cumulative funding gap by more than $10 billion although this reduction was offset by insufficient contributions Average performance through the following fiscal year ending June 30 2019 was under 710 Economic conditions in the third quarter of fiscal year 2020 point to a shortfall in meeting investment targets and an increase in unfunded liabilities of up to $500 billion nine months through the fiscal year

States cannot rely on investment income alone to chip away at their accumulated pension debt Pew has collected annual financial data on state-run pension systems since before the recession But even after a decade of economic recovery states have made limited progress in paying down pension debt In fact since 2007 the shortfall between actual contributions to state pension plans and minimum actuarial funding standards was $200 billion11

Changes to plan assumptions also decreased reported liabilities by $30 billion in 2018 however that result is driven by Colorado Kentucky Minnesota and New Jersey where improvements in funded status allowed plans to substantially increase their discount rates The remaining 46 states reported an increase in liabilities of $39 billion from assumption changes

South Dakota -$9075 -$2332 $6743 $93882 $128724 $34842 $41585 -$145567 $0 $5221 $181932

Tennessee $1695312 $1139335 -$555977 $628657 $1141243 $512586 -$43391 -$606253 $17316 -$32315 $577861

Texas $55145722 $76472542 $21326821 $5773590 $4280858 -$1492733 $19834088 -$274164 $2825 $68677 $20036750

Utah $3420315 $5448659 $2028344 $842749 $1177968 $335219 $2363563 $2338849 $0 $24714 $0

Vermont $2283896 $2418440 $134544 $198082 $199899 $1816 $136361 $12217 $194 $156907 -$32957

Virginia $21480408 $20337887 -$1142521 $2501020 $2554085 $53065 -$1089456 -$240348 $10811 -$859919 $0

Washington $9883432 $6048473 -$3834959 $1559838 $2827714 $1267876 -$2567083 -$1546224 $175100 -$118086 -$1077873

West Virginia $3917091 $3357120 -$559971 $411449 $678234 $266785 -$293186 -$279644 $0 -$14504 $962

Wisconsin -$2969118 $3557687 $6526805 $646671 $1065965 $419294 $6946099 $11552920 $0 -$4968302 $361481

Wyoming $2700673 $3642608 $941935 $239060 $178228 -$60832 $881102 $882867 $0 -$67752 $65987

Total $1276007674 $1237791374 -$38216300 $126118030 $114658013 -$11460017 -$49676317 -$10189958 -$11422892 $1934455 -$29997922

19

Change in Pension DebtStrong investment performance and changes in assumptions reduced reported pension debt by $10 billion and $30 billion respectively

Source Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Appendix F Net amortization benchmarkThe benchmark is calculated by taking the sum of service cost (the actuarial value of the benefits earned in 2018 also called normal cost) and interest on the net pension liability at the beginning of the year (each pension planrsquos total pension liability and the net pension liability both grow annually at the planrsquos assumed rate of return) and subtracting employee contributions Employer and employee contributions are adjusted to reflect expected interest After subtracting the $43 billion contributed by workers nationwide in 2018 (including interest) employers would have needed to contribute $126 billion to meet the net amortization benchmark to keep pension debt from growing To actually make progress on closing the funding gap states would have to exceed the contribution benchmark on a consistent basis

In b

illio

ns

$0

$200

$400

$600

$800

$1000

$1200

$1400

2018 netpension liability

Other factorsNetamortization

Changes inassumptions

Investmentgains

2017 netpension liability

$1276 -$10 -$30 -$9$11 $1238

For further information please visit pewtrustsorgpensions

Contact Sarah Jones communications officer Email sjonespewtrustsorg Project website pewtrustsorgpensions

The Pew Charitable Trusts is driven by the power of knowledge to solve todayrsquos most challenging problems Pew applies a rigorous analytical approach to improve public policy inform the public and invigorate civic life

Endnotes1 See Appendix F for more information on the net amortization benchmark

2 For example the US experienced annual gross domestic product (GDP) growth of more than 55 from 1988 through 2007 while the Congressional Budget Office now projects only 4 annual growth for the next decade See Congressional Budget Office ldquoThe Budget and Economic Outlook 2019 to 2029rdquo (2019) httpswwwcbogovsstemfiles2019-0354918-Outlook-3pdf

3 See SEBAC 2017 Agreement httpaftctorgsitesaftctorgfilessebac_2017_ta_signedpdf for details on Connecticut State Employees Retirement System (SERS) pension reforms

4 See Fitch Ratings ldquoConnecticut Teacher Pension Changes Costly but Lower Fiscal Risksrdquo Feb 28 2019 httpswwwfitchratingscomsitepr10064878

5 National Association of State Retirement Administrators ldquoNASRA Issue Brief Public Pension Plan Investment Return Assumptionsrdquo (updated April 2014) httpwwwnasraorgfilesIssue20BriefsNASRAInvReturnAssumptBriefpdf

6 Low return scenario assumes a 5 return

7 K Brainard and A Brown ldquoIn-Depth Risk Sharing in Public Retirement Plansrdquo (National Association of State Retirement Administrators 2018)

8 GASB Statement 67 on Financial Reporting for Pension Plans does also require an adjustment to the discount rate assumptionsmdashresulting in a higher reported pension liabilitymdashif current contribution policies are deemed insufficient However as of 2018 reporting only nine of the largest 100 plans across the 50 states are required to make this adjustment down from 15 in 2017

9 The Pew Charitable Trusts ldquoFoundation for Public Pensions Risk Reportingrdquo (2018) httpswwwhksharvardedusitesdefaultfilescentersmrcbgprogramsFoundation20for20Pensions20Risk20Reporting20(Strawman)pdf

10 Wilshire Trust Universe Comparison Service and Wilshire TUCS are service marks of Wilshire Associates Inc (ldquoWilshirerdquo) and have been licensed for use by The Pew Charitable Trusts All content of Wilshire TUCS is copyright 2019 Wilshire Associates Inc all rights reserved

11 Accounting standards changed in 2014 From 2007 to 2013 the shortfall is calculated between the actuarial recommended contribution and actual employer contributions From 2014 to 2018 the shortfall represents the gap between the net amortization benchmark and employer contributions

16

Appendix D Details of changes to net pension liability 2018In thousands

StateBeginning of year net

pension liability

End of year net pension

liabilityTotal changes

Net amortization benchmark

Employer + other

contributions

Net amortization

Change to reconcile

Investment experience

Benefit changes

Actuarial experience

Actuarial changes

Alabama $15251096 $15228842 -$22254 $1369188 $1293504 -$75684 -$97938 -$544500 $0 $177032 $269530

Alaska $7243003 $6929477 -$313526 $694030 $556411 -$137619 -$451145 -$17225 $0 -$433920 $0

Arizona $27416368 $25215806 -$2200562 $2600269 $2162496 -$437773 -$2638335 -$826137 -$116011 $515560 -$2211747

Arkansas $7853261 $6508389 -$1344872 $872501 $776295 -$96206 -$1441078 -$959873 $0 $34562 -$515767

California $191130787 $184852140 -$6278647 $20841956 $24116619 $3274664 -$3003983 -$3031295 $668 $2158587 -$2131943

Colorado $54596452 $31507099 -$23089353 $4014647 $1903073 -$2111573 -$25200926 $4206458 -$5980577 $889134 -$24315941

Connecticut $34811035 $35070959 $259924 $2929730 $2840519 -$89212 $170712 $74367 $510940 -$414595 $0

Delaware $1961753 $1761069 -$200684 $281677 $280407 -$1271 -$201955 -$285729 $11154 $89307 -$16687

Florida $40281942 $40704631 $422689 $4393427 $3501282 -$892145 -$469456 -$3049099 $0 $742984 $1836659

Georgia $22889927 $22930800 $40873 $2561609 $2857440 $295831 $336704 -$1164304 $72381 $1084627 $344000

Hawaii $12950306 $13318993 $368687 $1222637 $876760 -$345878 $22810 -$101944 $0 $124753 $0

Idaho $1506653 $1380532 -$126121 $293986 $394422 $100436 -$25684 -$167683 $83585 -$47697 $106111

Illinois $136881554 $140593161 $3711607 $11333437 $8143193 -$3190244 $521363 -$797304 -$374603 $731439 $961832

Indiana $17326203 $14571271 -$2754932 $1709366 $1989838 $280471 -$2474461 -$619782 $0 -$169086 -$1685593

Iowa $6840464 $6481626 -$358838 $854807 $777309 -$77498 -$436336 -$363061 -$1208 -$140228 $68161

Kansas $9128629 $8900507 -$228122 $823625 $921493 $97868 -$130254 -$83111 $0 -$47143 $0

Kentucky $42916062 $28603539 -$14312523 $2847550 $1885289 -$962261 -$15274784 -$1098415 $10513 -$19567 -$14167315

Louisiana $18214179 $17591031 -$623148 $1552242 $2117818 $565576 -$57572 -$696779 $658 -$195920 $834469

Continued on next page

17

Maine $2995575 $2665535 -$330041 $303668 $411397 $107728 -$222312 -$391240 -$106123 $35815 $239236

Maryland $22584000 $21954935 -$629065 $2197359 $2110351 -$87008 -$716073 -$185256 $5505 -$653748 $117426

Massachusetts $35710159 $36941268 $1231109 $3029358 $2674071 -$355287 $875822 -$785503 $0 $194325 $1467000

Michigan $32483291 $37602953 $5119662 $2834285 $3675705 $841420 $5961081 -$2089131 $0 -$64336 $8114548

Minnesota $37198871 $15188717 -$22010154 $3372821 $1399477 -$1973343 -$23983497 -$2573005 -$5765677 $1583 -$15646398

Mississippi $16783124 $16809495 $26371 $1415802 $1073116 -$342685 -$316314 -$354928 $0 $38614 $0

Missouri $15774044 $16635515 $861471 $1498857 $1582607 $83750 $945221 -$404892 -$8 -$7407 $1357528

Montana $4080482 $4381723 $301241 $359673 $362690 $3017 $304258 -$109601 $0 $207538 $206321

Nebraska $1474474 $1526977 $52503 $230380 $320606 $90225 $142728 $119428 $88636 -$65335 $0

Nevada $13319492 $13651509 $332017 $1113217 $970167 -$143051 $188966 -$315116 $0 $504082 $0

New Hampshire

$4965063 $4852683 -$112380 $407022 $444277 $37255 -$75125 -$108669 $0 $29109 $4435

New Jersey $142288433 $130717090 -$11571343 $13341800 $4691558 -$8650242 -$20221585 -$6169156 $0 $850491 -$14902920

New Mexico $16485691 $18166479 $1680788 $1344963 $738207 -$606756 $1074032 -$58134 $0 -$74477 $1206643

New York $11468876 $4238202 -$7230674 $4120187 $4989268 $869081 -$6361593 -$7838038 $0 $1476445 $0

North Carolina $9631900 $12509924 $2878024 $1681154 $2207884 $526731 $3404755 -$100834 $44793 $1199449 $2261347

North Dakota $2987137 $3030258 $43121 $291362 $198577 -$92785 -$49665 -$86485 $0 -$94216 $131036

Ohio $39735633 $50018612 $10282979 $2937048 $3748626 $811578 $11094557 $7711615 $0 -$307530 $3690472

Oklahoma $8548375 $7397822 -$1150553 $945600 $1326526 $380926 -$769626 -$575769 -$113763 -$105401 $25307

Oregon $13480000 $15148600 $1668600 $2065714 $1439274 -$626440 $1042160 -$1272440 $0 $74300 $2240300

Pennsylvania $66328481 $68835965 $2507484 $6193758 $6522941 $329183 $2836667 $3414973 $0 -$578306 $0

Rhode Island $5454061 $5481096 $27035 $438285 $433127 -$5157 $21877 -$50633 $0 $72627 -$116

South Carolina $25482182 $25465724 -$16458 $1904033 $1710476 -$193557 -$210015 -$136380 $0 -$73635 $0

Continued on next page

18

Sources Comprehensive annual financial reports actuarial reports and valuations or other public documents or as provided by plan

copy 2020 The Pew Charitable Trusts

Appendix E Debt driversStatesrsquo improved fiscal position in 2018 was driven by strong investment returnsmdash86 for those reporting on a fiscal year ending June 30mdashthat exceeded plan assumptions On their own investment returns lowered the cumulative funding gap by more than $10 billion although this reduction was offset by insufficient contributions Average performance through the following fiscal year ending June 30 2019 was under 710 Economic conditions in the third quarter of fiscal year 2020 point to a shortfall in meeting investment targets and an increase in unfunded liabilities of up to $500 billion nine months through the fiscal year

States cannot rely on investment income alone to chip away at their accumulated pension debt Pew has collected annual financial data on state-run pension systems since before the recession But even after a decade of economic recovery states have made limited progress in paying down pension debt In fact since 2007 the shortfall between actual contributions to state pension plans and minimum actuarial funding standards was $200 billion11

Changes to plan assumptions also decreased reported liabilities by $30 billion in 2018 however that result is driven by Colorado Kentucky Minnesota and New Jersey where improvements in funded status allowed plans to substantially increase their discount rates The remaining 46 states reported an increase in liabilities of $39 billion from assumption changes

South Dakota -$9075 -$2332 $6743 $93882 $128724 $34842 $41585 -$145567 $0 $5221 $181932

Tennessee $1695312 $1139335 -$555977 $628657 $1141243 $512586 -$43391 -$606253 $17316 -$32315 $577861

Texas $55145722 $76472542 $21326821 $5773590 $4280858 -$1492733 $19834088 -$274164 $2825 $68677 $20036750

Utah $3420315 $5448659 $2028344 $842749 $1177968 $335219 $2363563 $2338849 $0 $24714 $0

Vermont $2283896 $2418440 $134544 $198082 $199899 $1816 $136361 $12217 $194 $156907 -$32957

Virginia $21480408 $20337887 -$1142521 $2501020 $2554085 $53065 -$1089456 -$240348 $10811 -$859919 $0

Washington $9883432 $6048473 -$3834959 $1559838 $2827714 $1267876 -$2567083 -$1546224 $175100 -$118086 -$1077873

West Virginia $3917091 $3357120 -$559971 $411449 $678234 $266785 -$293186 -$279644 $0 -$14504 $962

Wisconsin -$2969118 $3557687 $6526805 $646671 $1065965 $419294 $6946099 $11552920 $0 -$4968302 $361481

Wyoming $2700673 $3642608 $941935 $239060 $178228 -$60832 $881102 $882867 $0 -$67752 $65987

Total $1276007674 $1237791374 -$38216300 $126118030 $114658013 -$11460017 -$49676317 -$10189958 -$11422892 $1934455 -$29997922

19

Change in Pension DebtStrong investment performance and changes in assumptions reduced reported pension debt by $10 billion and $30 billion respectively

Source Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Appendix F Net amortization benchmarkThe benchmark is calculated by taking the sum of service cost (the actuarial value of the benefits earned in 2018 also called normal cost) and interest on the net pension liability at the beginning of the year (each pension planrsquos total pension liability and the net pension liability both grow annually at the planrsquos assumed rate of return) and subtracting employee contributions Employer and employee contributions are adjusted to reflect expected interest After subtracting the $43 billion contributed by workers nationwide in 2018 (including interest) employers would have needed to contribute $126 billion to meet the net amortization benchmark to keep pension debt from growing To actually make progress on closing the funding gap states would have to exceed the contribution benchmark on a consistent basis

In b

illio

ns

$0

$200

$400

$600

$800

$1000

$1200

$1400

2018 netpension liability

Other factorsNetamortization

Changes inassumptions

Investmentgains

2017 netpension liability

$1276 -$10 -$30 -$9$11 $1238

For further information please visit pewtrustsorgpensions

Contact Sarah Jones communications officer Email sjonespewtrustsorg Project website pewtrustsorgpensions

The Pew Charitable Trusts is driven by the power of knowledge to solve todayrsquos most challenging problems Pew applies a rigorous analytical approach to improve public policy inform the public and invigorate civic life

Endnotes1 See Appendix F for more information on the net amortization benchmark

2 For example the US experienced annual gross domestic product (GDP) growth of more than 55 from 1988 through 2007 while the Congressional Budget Office now projects only 4 annual growth for the next decade See Congressional Budget Office ldquoThe Budget and Economic Outlook 2019 to 2029rdquo (2019) httpswwwcbogovsstemfiles2019-0354918-Outlook-3pdf

3 See SEBAC 2017 Agreement httpaftctorgsitesaftctorgfilessebac_2017_ta_signedpdf for details on Connecticut State Employees Retirement System (SERS) pension reforms

4 See Fitch Ratings ldquoConnecticut Teacher Pension Changes Costly but Lower Fiscal Risksrdquo Feb 28 2019 httpswwwfitchratingscomsitepr10064878

5 National Association of State Retirement Administrators ldquoNASRA Issue Brief Public Pension Plan Investment Return Assumptionsrdquo (updated April 2014) httpwwwnasraorgfilesIssue20BriefsNASRAInvReturnAssumptBriefpdf

6 Low return scenario assumes a 5 return

7 K Brainard and A Brown ldquoIn-Depth Risk Sharing in Public Retirement Plansrdquo (National Association of State Retirement Administrators 2018)

8 GASB Statement 67 on Financial Reporting for Pension Plans does also require an adjustment to the discount rate assumptionsmdashresulting in a higher reported pension liabilitymdashif current contribution policies are deemed insufficient However as of 2018 reporting only nine of the largest 100 plans across the 50 states are required to make this adjustment down from 15 in 2017

9 The Pew Charitable Trusts ldquoFoundation for Public Pensions Risk Reportingrdquo (2018) httpswwwhksharvardedusitesdefaultfilescentersmrcbgprogramsFoundation20for20Pensions20Risk20Reporting20(Strawman)pdf

10 Wilshire Trust Universe Comparison Service and Wilshire TUCS are service marks of Wilshire Associates Inc (ldquoWilshirerdquo) and have been licensed for use by The Pew Charitable Trusts All content of Wilshire TUCS is copyright 2019 Wilshire Associates Inc all rights reserved

11 Accounting standards changed in 2014 From 2007 to 2013 the shortfall is calculated between the actuarial recommended contribution and actual employer contributions From 2014 to 2018 the shortfall represents the gap between the net amortization benchmark and employer contributions

17

Maine $2995575 $2665535 -$330041 $303668 $411397 $107728 -$222312 -$391240 -$106123 $35815 $239236

Maryland $22584000 $21954935 -$629065 $2197359 $2110351 -$87008 -$716073 -$185256 $5505 -$653748 $117426

Massachusetts $35710159 $36941268 $1231109 $3029358 $2674071 -$355287 $875822 -$785503 $0 $194325 $1467000

Michigan $32483291 $37602953 $5119662 $2834285 $3675705 $841420 $5961081 -$2089131 $0 -$64336 $8114548

Minnesota $37198871 $15188717 -$22010154 $3372821 $1399477 -$1973343 -$23983497 -$2573005 -$5765677 $1583 -$15646398

Mississippi $16783124 $16809495 $26371 $1415802 $1073116 -$342685 -$316314 -$354928 $0 $38614 $0

Missouri $15774044 $16635515 $861471 $1498857 $1582607 $83750 $945221 -$404892 -$8 -$7407 $1357528

Montana $4080482 $4381723 $301241 $359673 $362690 $3017 $304258 -$109601 $0 $207538 $206321

Nebraska $1474474 $1526977 $52503 $230380 $320606 $90225 $142728 $119428 $88636 -$65335 $0

Nevada $13319492 $13651509 $332017 $1113217 $970167 -$143051 $188966 -$315116 $0 $504082 $0

New Hampshire

$4965063 $4852683 -$112380 $407022 $444277 $37255 -$75125 -$108669 $0 $29109 $4435

New Jersey $142288433 $130717090 -$11571343 $13341800 $4691558 -$8650242 -$20221585 -$6169156 $0 $850491 -$14902920

New Mexico $16485691 $18166479 $1680788 $1344963 $738207 -$606756 $1074032 -$58134 $0 -$74477 $1206643

New York $11468876 $4238202 -$7230674 $4120187 $4989268 $869081 -$6361593 -$7838038 $0 $1476445 $0

North Carolina $9631900 $12509924 $2878024 $1681154 $2207884 $526731 $3404755 -$100834 $44793 $1199449 $2261347

North Dakota $2987137 $3030258 $43121 $291362 $198577 -$92785 -$49665 -$86485 $0 -$94216 $131036

Ohio $39735633 $50018612 $10282979 $2937048 $3748626 $811578 $11094557 $7711615 $0 -$307530 $3690472

Oklahoma $8548375 $7397822 -$1150553 $945600 $1326526 $380926 -$769626 -$575769 -$113763 -$105401 $25307

Oregon $13480000 $15148600 $1668600 $2065714 $1439274 -$626440 $1042160 -$1272440 $0 $74300 $2240300

Pennsylvania $66328481 $68835965 $2507484 $6193758 $6522941 $329183 $2836667 $3414973 $0 -$578306 $0

Rhode Island $5454061 $5481096 $27035 $438285 $433127 -$5157 $21877 -$50633 $0 $72627 -$116

South Carolina $25482182 $25465724 -$16458 $1904033 $1710476 -$193557 -$210015 -$136380 $0 -$73635 $0

Continued on next page

18

Sources Comprehensive annual financial reports actuarial reports and valuations or other public documents or as provided by plan

copy 2020 The Pew Charitable Trusts

Appendix E Debt driversStatesrsquo improved fiscal position in 2018 was driven by strong investment returnsmdash86 for those reporting on a fiscal year ending June 30mdashthat exceeded plan assumptions On their own investment returns lowered the cumulative funding gap by more than $10 billion although this reduction was offset by insufficient contributions Average performance through the following fiscal year ending June 30 2019 was under 710 Economic conditions in the third quarter of fiscal year 2020 point to a shortfall in meeting investment targets and an increase in unfunded liabilities of up to $500 billion nine months through the fiscal year

States cannot rely on investment income alone to chip away at their accumulated pension debt Pew has collected annual financial data on state-run pension systems since before the recession But even after a decade of economic recovery states have made limited progress in paying down pension debt In fact since 2007 the shortfall between actual contributions to state pension plans and minimum actuarial funding standards was $200 billion11

Changes to plan assumptions also decreased reported liabilities by $30 billion in 2018 however that result is driven by Colorado Kentucky Minnesota and New Jersey where improvements in funded status allowed plans to substantially increase their discount rates The remaining 46 states reported an increase in liabilities of $39 billion from assumption changes

South Dakota -$9075 -$2332 $6743 $93882 $128724 $34842 $41585 -$145567 $0 $5221 $181932

Tennessee $1695312 $1139335 -$555977 $628657 $1141243 $512586 -$43391 -$606253 $17316 -$32315 $577861

Texas $55145722 $76472542 $21326821 $5773590 $4280858 -$1492733 $19834088 -$274164 $2825 $68677 $20036750

Utah $3420315 $5448659 $2028344 $842749 $1177968 $335219 $2363563 $2338849 $0 $24714 $0

Vermont $2283896 $2418440 $134544 $198082 $199899 $1816 $136361 $12217 $194 $156907 -$32957

Virginia $21480408 $20337887 -$1142521 $2501020 $2554085 $53065 -$1089456 -$240348 $10811 -$859919 $0

Washington $9883432 $6048473 -$3834959 $1559838 $2827714 $1267876 -$2567083 -$1546224 $175100 -$118086 -$1077873

West Virginia $3917091 $3357120 -$559971 $411449 $678234 $266785 -$293186 -$279644 $0 -$14504 $962

Wisconsin -$2969118 $3557687 $6526805 $646671 $1065965 $419294 $6946099 $11552920 $0 -$4968302 $361481

Wyoming $2700673 $3642608 $941935 $239060 $178228 -$60832 $881102 $882867 $0 -$67752 $65987

Total $1276007674 $1237791374 -$38216300 $126118030 $114658013 -$11460017 -$49676317 -$10189958 -$11422892 $1934455 -$29997922

19

Change in Pension DebtStrong investment performance and changes in assumptions reduced reported pension debt by $10 billion and $30 billion respectively

Source Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Appendix F Net amortization benchmarkThe benchmark is calculated by taking the sum of service cost (the actuarial value of the benefits earned in 2018 also called normal cost) and interest on the net pension liability at the beginning of the year (each pension planrsquos total pension liability and the net pension liability both grow annually at the planrsquos assumed rate of return) and subtracting employee contributions Employer and employee contributions are adjusted to reflect expected interest After subtracting the $43 billion contributed by workers nationwide in 2018 (including interest) employers would have needed to contribute $126 billion to meet the net amortization benchmark to keep pension debt from growing To actually make progress on closing the funding gap states would have to exceed the contribution benchmark on a consistent basis

In b

illio

ns

$0

$200

$400

$600

$800

$1000

$1200

$1400

2018 netpension liability

Other factorsNetamortization

Changes inassumptions

Investmentgains

2017 netpension liability

$1276 -$10 -$30 -$9$11 $1238

For further information please visit pewtrustsorgpensions

Contact Sarah Jones communications officer Email sjonespewtrustsorg Project website pewtrustsorgpensions

The Pew Charitable Trusts is driven by the power of knowledge to solve todayrsquos most challenging problems Pew applies a rigorous analytical approach to improve public policy inform the public and invigorate civic life

Endnotes1 See Appendix F for more information on the net amortization benchmark

2 For example the US experienced annual gross domestic product (GDP) growth of more than 55 from 1988 through 2007 while the Congressional Budget Office now projects only 4 annual growth for the next decade See Congressional Budget Office ldquoThe Budget and Economic Outlook 2019 to 2029rdquo (2019) httpswwwcbogovsstemfiles2019-0354918-Outlook-3pdf

3 See SEBAC 2017 Agreement httpaftctorgsitesaftctorgfilessebac_2017_ta_signedpdf for details on Connecticut State Employees Retirement System (SERS) pension reforms

4 See Fitch Ratings ldquoConnecticut Teacher Pension Changes Costly but Lower Fiscal Risksrdquo Feb 28 2019 httpswwwfitchratingscomsitepr10064878

5 National Association of State Retirement Administrators ldquoNASRA Issue Brief Public Pension Plan Investment Return Assumptionsrdquo (updated April 2014) httpwwwnasraorgfilesIssue20BriefsNASRAInvReturnAssumptBriefpdf

6 Low return scenario assumes a 5 return

7 K Brainard and A Brown ldquoIn-Depth Risk Sharing in Public Retirement Plansrdquo (National Association of State Retirement Administrators 2018)

8 GASB Statement 67 on Financial Reporting for Pension Plans does also require an adjustment to the discount rate assumptionsmdashresulting in a higher reported pension liabilitymdashif current contribution policies are deemed insufficient However as of 2018 reporting only nine of the largest 100 plans across the 50 states are required to make this adjustment down from 15 in 2017

9 The Pew Charitable Trusts ldquoFoundation for Public Pensions Risk Reportingrdquo (2018) httpswwwhksharvardedusitesdefaultfilescentersmrcbgprogramsFoundation20for20Pensions20Risk20Reporting20(Strawman)pdf

10 Wilshire Trust Universe Comparison Service and Wilshire TUCS are service marks of Wilshire Associates Inc (ldquoWilshirerdquo) and have been licensed for use by The Pew Charitable Trusts All content of Wilshire TUCS is copyright 2019 Wilshire Associates Inc all rights reserved

11 Accounting standards changed in 2014 From 2007 to 2013 the shortfall is calculated between the actuarial recommended contribution and actual employer contributions From 2014 to 2018 the shortfall represents the gap between the net amortization benchmark and employer contributions

18

Sources Comprehensive annual financial reports actuarial reports and valuations or other public documents or as provided by plan

copy 2020 The Pew Charitable Trusts

Appendix E Debt driversStatesrsquo improved fiscal position in 2018 was driven by strong investment returnsmdash86 for those reporting on a fiscal year ending June 30mdashthat exceeded plan assumptions On their own investment returns lowered the cumulative funding gap by more than $10 billion although this reduction was offset by insufficient contributions Average performance through the following fiscal year ending June 30 2019 was under 710 Economic conditions in the third quarter of fiscal year 2020 point to a shortfall in meeting investment targets and an increase in unfunded liabilities of up to $500 billion nine months through the fiscal year

States cannot rely on investment income alone to chip away at their accumulated pension debt Pew has collected annual financial data on state-run pension systems since before the recession But even after a decade of economic recovery states have made limited progress in paying down pension debt In fact since 2007 the shortfall between actual contributions to state pension plans and minimum actuarial funding standards was $200 billion11

Changes to plan assumptions also decreased reported liabilities by $30 billion in 2018 however that result is driven by Colorado Kentucky Minnesota and New Jersey where improvements in funded status allowed plans to substantially increase their discount rates The remaining 46 states reported an increase in liabilities of $39 billion from assumption changes

South Dakota -$9075 -$2332 $6743 $93882 $128724 $34842 $41585 -$145567 $0 $5221 $181932

Tennessee $1695312 $1139335 -$555977 $628657 $1141243 $512586 -$43391 -$606253 $17316 -$32315 $577861

Texas $55145722 $76472542 $21326821 $5773590 $4280858 -$1492733 $19834088 -$274164 $2825 $68677 $20036750

Utah $3420315 $5448659 $2028344 $842749 $1177968 $335219 $2363563 $2338849 $0 $24714 $0

Vermont $2283896 $2418440 $134544 $198082 $199899 $1816 $136361 $12217 $194 $156907 -$32957

Virginia $21480408 $20337887 -$1142521 $2501020 $2554085 $53065 -$1089456 -$240348 $10811 -$859919 $0

Washington $9883432 $6048473 -$3834959 $1559838 $2827714 $1267876 -$2567083 -$1546224 $175100 -$118086 -$1077873

West Virginia $3917091 $3357120 -$559971 $411449 $678234 $266785 -$293186 -$279644 $0 -$14504 $962

Wisconsin -$2969118 $3557687 $6526805 $646671 $1065965 $419294 $6946099 $11552920 $0 -$4968302 $361481

Wyoming $2700673 $3642608 $941935 $239060 $178228 -$60832 $881102 $882867 $0 -$67752 $65987

Total $1276007674 $1237791374 -$38216300 $126118030 $114658013 -$11460017 -$49676317 -$10189958 -$11422892 $1934455 -$29997922

19

Change in Pension DebtStrong investment performance and changes in assumptions reduced reported pension debt by $10 billion and $30 billion respectively

Source Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Appendix F Net amortization benchmarkThe benchmark is calculated by taking the sum of service cost (the actuarial value of the benefits earned in 2018 also called normal cost) and interest on the net pension liability at the beginning of the year (each pension planrsquos total pension liability and the net pension liability both grow annually at the planrsquos assumed rate of return) and subtracting employee contributions Employer and employee contributions are adjusted to reflect expected interest After subtracting the $43 billion contributed by workers nationwide in 2018 (including interest) employers would have needed to contribute $126 billion to meet the net amortization benchmark to keep pension debt from growing To actually make progress on closing the funding gap states would have to exceed the contribution benchmark on a consistent basis

In b

illio

ns

$0

$200

$400

$600

$800

$1000

$1200

$1400

2018 netpension liability

Other factorsNetamortization

Changes inassumptions

Investmentgains

2017 netpension liability

$1276 -$10 -$30 -$9$11 $1238

For further information please visit pewtrustsorgpensions

Contact Sarah Jones communications officer Email sjonespewtrustsorg Project website pewtrustsorgpensions

The Pew Charitable Trusts is driven by the power of knowledge to solve todayrsquos most challenging problems Pew applies a rigorous analytical approach to improve public policy inform the public and invigorate civic life

Endnotes1 See Appendix F for more information on the net amortization benchmark

2 For example the US experienced annual gross domestic product (GDP) growth of more than 55 from 1988 through 2007 while the Congressional Budget Office now projects only 4 annual growth for the next decade See Congressional Budget Office ldquoThe Budget and Economic Outlook 2019 to 2029rdquo (2019) httpswwwcbogovsstemfiles2019-0354918-Outlook-3pdf

3 See SEBAC 2017 Agreement httpaftctorgsitesaftctorgfilessebac_2017_ta_signedpdf for details on Connecticut State Employees Retirement System (SERS) pension reforms

4 See Fitch Ratings ldquoConnecticut Teacher Pension Changes Costly but Lower Fiscal Risksrdquo Feb 28 2019 httpswwwfitchratingscomsitepr10064878

5 National Association of State Retirement Administrators ldquoNASRA Issue Brief Public Pension Plan Investment Return Assumptionsrdquo (updated April 2014) httpwwwnasraorgfilesIssue20BriefsNASRAInvReturnAssumptBriefpdf

6 Low return scenario assumes a 5 return

7 K Brainard and A Brown ldquoIn-Depth Risk Sharing in Public Retirement Plansrdquo (National Association of State Retirement Administrators 2018)

8 GASB Statement 67 on Financial Reporting for Pension Plans does also require an adjustment to the discount rate assumptionsmdashresulting in a higher reported pension liabilitymdashif current contribution policies are deemed insufficient However as of 2018 reporting only nine of the largest 100 plans across the 50 states are required to make this adjustment down from 15 in 2017

9 The Pew Charitable Trusts ldquoFoundation for Public Pensions Risk Reportingrdquo (2018) httpswwwhksharvardedusitesdefaultfilescentersmrcbgprogramsFoundation20for20Pensions20Risk20Reporting20(Strawman)pdf

10 Wilshire Trust Universe Comparison Service and Wilshire TUCS are service marks of Wilshire Associates Inc (ldquoWilshirerdquo) and have been licensed for use by The Pew Charitable Trusts All content of Wilshire TUCS is copyright 2019 Wilshire Associates Inc all rights reserved

11 Accounting standards changed in 2014 From 2007 to 2013 the shortfall is calculated between the actuarial recommended contribution and actual employer contributions From 2014 to 2018 the shortfall represents the gap between the net amortization benchmark and employer contributions

19

Change in Pension DebtStrong investment performance and changes in assumptions reduced reported pension debt by $10 billion and $30 billion respectively

Source Comprehensive annual financial reports actuarial reports and valuations other public documents or as provided by plan officials

copy 2020 The Pew Charitable Trusts

Appendix F Net amortization benchmarkThe benchmark is calculated by taking the sum of service cost (the actuarial value of the benefits earned in 2018 also called normal cost) and interest on the net pension liability at the beginning of the year (each pension planrsquos total pension liability and the net pension liability both grow annually at the planrsquos assumed rate of return) and subtracting employee contributions Employer and employee contributions are adjusted to reflect expected interest After subtracting the $43 billion contributed by workers nationwide in 2018 (including interest) employers would have needed to contribute $126 billion to meet the net amortization benchmark to keep pension debt from growing To actually make progress on closing the funding gap states would have to exceed the contribution benchmark on a consistent basis

In b

illio

ns

$0

$200

$400

$600

$800

$1000

$1200

$1400

2018 netpension liability

Other factorsNetamortization

Changes inassumptions

Investmentgains

2017 netpension liability

$1276 -$10 -$30 -$9$11 $1238

For further information please visit pewtrustsorgpensions

Contact Sarah Jones communications officer Email sjonespewtrustsorg Project website pewtrustsorgpensions

The Pew Charitable Trusts is driven by the power of knowledge to solve todayrsquos most challenging problems Pew applies a rigorous analytical approach to improve public policy inform the public and invigorate civic life

Endnotes1 See Appendix F for more information on the net amortization benchmark

2 For example the US experienced annual gross domestic product (GDP) growth of more than 55 from 1988 through 2007 while the Congressional Budget Office now projects only 4 annual growth for the next decade See Congressional Budget Office ldquoThe Budget and Economic Outlook 2019 to 2029rdquo (2019) httpswwwcbogovsstemfiles2019-0354918-Outlook-3pdf

3 See SEBAC 2017 Agreement httpaftctorgsitesaftctorgfilessebac_2017_ta_signedpdf for details on Connecticut State Employees Retirement System (SERS) pension reforms

4 See Fitch Ratings ldquoConnecticut Teacher Pension Changes Costly but Lower Fiscal Risksrdquo Feb 28 2019 httpswwwfitchratingscomsitepr10064878

5 National Association of State Retirement Administrators ldquoNASRA Issue Brief Public Pension Plan Investment Return Assumptionsrdquo (updated April 2014) httpwwwnasraorgfilesIssue20BriefsNASRAInvReturnAssumptBriefpdf

6 Low return scenario assumes a 5 return

7 K Brainard and A Brown ldquoIn-Depth Risk Sharing in Public Retirement Plansrdquo (National Association of State Retirement Administrators 2018)

8 GASB Statement 67 on Financial Reporting for Pension Plans does also require an adjustment to the discount rate assumptionsmdashresulting in a higher reported pension liabilitymdashif current contribution policies are deemed insufficient However as of 2018 reporting only nine of the largest 100 plans across the 50 states are required to make this adjustment down from 15 in 2017

9 The Pew Charitable Trusts ldquoFoundation for Public Pensions Risk Reportingrdquo (2018) httpswwwhksharvardedusitesdefaultfilescentersmrcbgprogramsFoundation20for20Pensions20Risk20Reporting20(Strawman)pdf

10 Wilshire Trust Universe Comparison Service and Wilshire TUCS are service marks of Wilshire Associates Inc (ldquoWilshirerdquo) and have been licensed for use by The Pew Charitable Trusts All content of Wilshire TUCS is copyright 2019 Wilshire Associates Inc all rights reserved

11 Accounting standards changed in 2014 From 2007 to 2013 the shortfall is calculated between the actuarial recommended contribution and actual employer contributions From 2014 to 2018 the shortfall represents the gap between the net amortization benchmark and employer contributions

For further information please visit pewtrustsorgpensions

Contact Sarah Jones communications officer Email sjonespewtrustsorg Project website pewtrustsorgpensions

The Pew Charitable Trusts is driven by the power of knowledge to solve todayrsquos most challenging problems Pew applies a rigorous analytical approach to improve public policy inform the public and invigorate civic life

Endnotes1 See Appendix F for more information on the net amortization benchmark

2 For example the US experienced annual gross domestic product (GDP) growth of more than 55 from 1988 through 2007 while the Congressional Budget Office now projects only 4 annual growth for the next decade See Congressional Budget Office ldquoThe Budget and Economic Outlook 2019 to 2029rdquo (2019) httpswwwcbogovsstemfiles2019-0354918-Outlook-3pdf

3 See SEBAC 2017 Agreement httpaftctorgsitesaftctorgfilessebac_2017_ta_signedpdf for details on Connecticut State Employees Retirement System (SERS) pension reforms

4 See Fitch Ratings ldquoConnecticut Teacher Pension Changes Costly but Lower Fiscal Risksrdquo Feb 28 2019 httpswwwfitchratingscomsitepr10064878

5 National Association of State Retirement Administrators ldquoNASRA Issue Brief Public Pension Plan Investment Return Assumptionsrdquo (updated April 2014) httpwwwnasraorgfilesIssue20BriefsNASRAInvReturnAssumptBriefpdf

6 Low return scenario assumes a 5 return

7 K Brainard and A Brown ldquoIn-Depth Risk Sharing in Public Retirement Plansrdquo (National Association of State Retirement Administrators 2018)

8 GASB Statement 67 on Financial Reporting for Pension Plans does also require an adjustment to the discount rate assumptionsmdashresulting in a higher reported pension liabilitymdashif current contribution policies are deemed insufficient However as of 2018 reporting only nine of the largest 100 plans across the 50 states are required to make this adjustment down from 15 in 2017

9 The Pew Charitable Trusts ldquoFoundation for Public Pensions Risk Reportingrdquo (2018) httpswwwhksharvardedusitesdefaultfilescentersmrcbgprogramsFoundation20for20Pensions20Risk20Reporting20(Strawman)pdf

10 Wilshire Trust Universe Comparison Service and Wilshire TUCS are service marks of Wilshire Associates Inc (ldquoWilshirerdquo) and have been licensed for use by The Pew Charitable Trusts All content of Wilshire TUCS is copyright 2019 Wilshire Associates Inc all rights reserved

11 Accounting standards changed in 2014 From 2007 to 2013 the shortfall is calculated between the actuarial recommended contribution and actual employer contributions From 2014 to 2018 the shortfall represents the gap between the net amortization benchmark and employer contributions