National Association of State Retirement Administrators


Funding Policies

A pension plan funding policy determines how much should be contributed each year by the employer and the active participants to provide for the secure funding of benefits in a systematic fashion. State funding policies are typically found in statute or board policy and are tied to an actuarially determined contribution. 

National organizations representing the nation's governors, state legislatures, local officials and public finance professionals formed a Pension Funding Task Force and released "
Pension Funding: A Guide For Elected Officials" in March 2013, which recommends state and local governments adopt pension funding policies based on the following five general policy objectives:

  • Have a pension funding policy that is based on an actuarially determined contribution.
  • Build funding discipline into the policy to ensure that promised benefits can be paid.
  • Maintain intergenerational equity so that the cost of employee benefits is paid by the generation of taxpayers who receives services.
  • Make employer costs a consistent percentage of payroll.
  • Require clear reporting to show how and when pension plans will be fully funded.
     

Dedicated Funding Sources

Some public pension plans receive some funding from dedicated funding sources (an ongoing or one-time revenue source that must, by law, be contributed to the pension fund). For example:

  • Arizona: A portion of taxes paid on fire insurance policies in Arizona are used to fund firefighting services and the firefighters relief and pension fund.

  • Jacksonville, Florida: Voters in 2016 approved a half cent sales tax, to take effect in 2030 upon the scheduled expiration of another half cent sales tax, to be used to reduce the city's unfunded pension liability.

  • Hawaii: Voters in 2016 approved a constitutional amendment adding unfunded pension liabilities and state bonded debt to the list of permissible uses of surplus general fund monies.

  • Kansas: The 2012 Legislature approved legislation as follows, "A share of state gaming revenues from state-owned casinos will be directed to the KPERS unfunded liability beginning in FY 2014, when the amount is estimated to be $30 million. Also, 80 percent of the proceeds from any sale of state surplus real estate will be directed to the KPERS unfunded liability until the retirement system reaches an 80 percent-funded ratio."

  • Louisiana: Voters in 2016 approved the Revenue Stabilization Trust Fund, for the deposit of recurring mineral and corporate tax revenues. Within designated limits, monies from the fund may be used to pay down "state employee retirement debt," among other purposes.

  • Montana: The Legislature in 2013 approved a bill dedicating a portion of the coal severance tax to amortizing the state's unfunded pension liabilities.

  • New Jersey: The Legislature in 2017 approved the transfer of ownership of the state lottery to the state pension fund.

  • Oklahoma: Oklahoma TRS receives 5 percent of the State's sales, use, and corporate and individual income taxes, collected as dedicated tax. The System receives 1% of the cigarette taxes collected by the State and receives 5 percent of net lottery proceeds collected by the State. In 2013, the Oklahoma Legislature created the Oklahoma Pension Stabilization Fund, into which surplus state revenues are deposited and from which the legislature may appropriate to the state pension fund the lowest funding ratio, as long as the funding ratio is below 90 percent.

  • Pennsylvania: The City of Pittsburgh dedicates a portion of revenues from parking assets to the city's pension fund.

  • Rhode Island: In addition to the statutory requirement that employers pay the actuarially determined contribution, statutes also require that, for each fiscal year in which the actuarially determined state contribution rate for state employees and teachers is lower than that for the prior fiscal year, "the governor shall include an appropriation to that system equivalent to twenty percent (20%) of the rate reduction to be applied to the actuarial accrued liability. The amounts to be appropriated shall be included in the annual appropriation bill and shall be paid by the general treasurer into the retirement system. The retirement system's actuary shall not adjust the computation of the annual required contribution for the year in which supplemental contributions are received; such contributions once made may be treated as reducing the actuarial liability remaining for amortization in the next following actuarial valuation to be performed. Statutes also require that for any fiscal year in which the State's actual general revenues exceed estimated amounts, the difference shall be paid to the ERS plan upon completion and release of the State's audited financial statements.

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