National Association of State Retirement Administrators

Funding Policies

A pension plan funding policy describes how pension benefits will be financed. State pension funding policies typically come in the form of statutes and retirement system board policies and practices. Core elements of a public pension funding policy are the actuarial cost method, the asset smoothing method, and the amortization policy.

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. Also, voters of the Town of Prescott in 2017 approved a three-fourths cent sales tax dedicated to reducing the unfunded liability of the town's pension plans for firefighters and police officers that are administered by the Public Safety Personnel Retirement System. The tax is projected to generate $11 million to $12 million annually and will stay in place through 2027 or until the unfunded liability falls below $1.5 million.

  • California: The City of Pasadena applies revenue from cell towers to its unfunded pension and OPEB liabilities.

  • Colorado: In 2018 the State of Colorado allocated annual funding of up to $225 million to the Colorado Public Employees' Retirement Association. This amount can be increased or decreased by $20 million if the combined PERA contribution rate is less than 98%, or greater than or equal to 120%, respectively, of the actuarially determined contribution. 

  • Connecticut: Statute directs that once the state Budget Reserve Fund has reached its statutory maximum, the state treasurer direct any remaining surplus funds to either the State Employees Retirement Fund or the Teachers Retirement System.

  • 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.

  • Illinois: The Chicago City Council in 2014 established a surcharge on 911 phone lines to fund the city laborers pension plan, and in 2016 the council approved an increase to city water and sewage fees, phased in over several years, to fund the city's Municipal Employees' Annuity and Benefit Fund. Also, at least three cities, including Springfield, apply a portion of an excise tax on sales of marijuana to city pensions. Peoria in 2019 approved a three-year property tax fee to fund pension costs for public safety employees.

  • 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.

  • Minnesota: The legislature in 2018 approved an annual state aid payment to the Minnesota Public Employees Retirement Association of $4.5 million in FY 19 and FY 20, and $9.0 million annually thereafter until FY 48.

  • Springfield, Missouri: The city charges a sales tax premium of 3/4 of one cent to fund a closed pension plan for public safety personnel.

  • Montana: The legislature in 2013 approved a bill dedicating a portion of the coal severance tax revenue to amortizing the state's unfunded pension liabilities. Separate legislation enacted the same year created a general fund statutory appropriation of $25 million per year to the Teachers' Retirement System.

  • Nebraska: The City of Omaha in 2010 approved a dining tax, a portion of whose revenues are used to fund city employee pensions.

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

  • North Carolina: The legislature in 2018 established a solvency reserve fund for purposes of paying down the state's unfunded pension and health care liabilities. The reserve is to be funded through several sources including General Assembly appropriations, overflows or statutory excesses from the state's "rainy day" fund, or savings from the refinancing of general obligation bonds. 

  • 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. Also, a portion of insurance premium taxes are appropriated to the state pension plans for firefighters and law enforcement personnel.

  • Oregon: The legislature in 2018 approved legislation directing a variety of revenue sources, including tax receipts on alcohol and marijuana, lottery revenues above estimates, and others, to fund public pensions.

  • Pennsylvania: The state charges a two percent casualty and fire insurance premium tax on out-of-state insurance companies; revenues are used to fund municipal pensions. In 2021, the Department of the Auditor General distributed a total of $317 million in aid to 1,492 municipalities and regional departments to support pension plans covering police officers, paid firefighters and non-uniformed employees. Also, 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.

NASRA Resources
Other Resources


Milliman Series on Pension Funding Policies