Key Takeaways
- • Reason Foundation argues that state and local defined benefit pension plans lack the enforceable legal guardrails that ERISA imposes on private-sector DB plans, leaving them exposed to political pressure on benefit design and funding.
- • The commentary cites a 77% aggregate funding level for public plans versus near-100% for private plans, attributing the gap in part to the absence of mandatory actuarially determined contributions and to level-percent-of-payroll amortization over 15 to 20 years.
- • Rhode Island's 2025 cost-of-living adjustment added over $400 million in liabilities to a plan already below 65% funded, according to the report.
- • Reason Foundation's proposed reforms include statutory ADC mandates, automatic adjustments, dedicated revenues, independent oversight, and shared contribution structures, with Wisconsin, South Dakota, Colorado, Arizona, Tennessee, Utah, Michigan, Oklahoma, and Texas cited as examples.
- • The report flags investment risk as a governance gap, citing CalPERS private equity allocations of up to 40% of the portfolio and return assumptions above 7.0% in some plans.
Summary
A Reason Foundation commentary argues that the public pension reforms enacted in recent years remain vulnerable to ongoing political pressure, particularly when budgets are strained by competing priorities such as Medicaid funding following federal cutbacks. The authors contend that state and local defined benefit (DB) plans operate without the minimum legally mandated design, funding, and management standards that the federal Employee Retirement Income Security Act of 1974 (ERISA) imposes on private-sector DB plans, and they identify several specific gaps.
The first gap concerns contributions. Public plan sponsors are generally not legally required to make actuarially determined contributions (ADCs), and boards typically lack authority to enforce funding. The report cites Illinois, New Jersey, and Kentucky as examples, and notes that many public plans amortize unfunded liabilities using a level percent-of-payroll method over 15 to 20 years, which defers payments to later in the period. By contrast, ERISA requires full level-dollar funding over seven years for shortfalls, with non-compliance triggering IRS excise taxes under 26 U.S.C. § 4971. The commentary states that private plans average near 100% funding versus a 77% aggregate level for public plans.
The report also highlights political pressure toward benefit enhancements, including for past service, that create new unfunded liabilities. It cites Rhode Island's 2025 cost-of-living adjustment, which added over $400 million in liabilities to a pension already below 65% funded. ERISA, by comparison, restricts benefit increases in plans funded below 80% (29 U.S.C. § 1083). The authors further note that many states' court-imposed restrictions lock in benefit structures for an employee's entire career, limiting changes even for future service, whereas ERISA protects accrued benefits while permitting adjustments to future accruals.
On investment and funding risk, the commentary states that many public sponsors have not set clear risk parameters for fiduciary boards, creating mismatches between funding volatility tolerance and actual portfolio risk. It points to return assumptions that remain overly optimistic in some plans, citing a National Association of State Retirement Administrators list of plans assuming returns above 7.0%, and cites CalPERS, where private equity may represent up to 40% of the portfolio. The report warns this can produce unpredictable employer contribution increases. The authors also argue that governing boards, lacking objective employer-driven guardrails, are more susceptible to mission drift toward non-financial considerations, and that politically driven investment mandates covering in-state investing, DEI, ESG, tobacco, or fossil fuels can reduce returns. They note ERISA fiduciary standards, including the Department of Labor's Interpretive Bulletin 2015-01, limit such considerations.
To address these gaps, the Reason Foundation recommends statutory ADC mandates, automatic adjustments, dedicated revenues, independent oversight, and shared contribution structures. The commentary says these mechanisms are already in use in Wisconsin, South Dakota, Colorado, Arizona, Tennessee, Utah, Michigan, Oklahoma, and Texas, and that they promote plan sustainability and reduce the risk of unfunded benefit enhancements and taxpayer burdens. The Foundation's Pension Integrity Project states it has advised policymakers in Arizona, Colorado, Michigan, and Montana.
The first gap concerns contributions. Public plan sponsors are generally not legally required to make actuarially determined contributions (ADCs), and boards typically lack authority to enforce funding. The report cites Illinois, New Jersey, and Kentucky as examples, and notes that many public plans amortize unfunded liabilities using a level percent-of-payroll method over 15 to 20 years, which defers payments to later in the period. By contrast, ERISA requires full level-dollar funding over seven years for shortfalls, with non-compliance triggering IRS excise taxes under 26 U.S.C. § 4971. The commentary states that private plans average near 100% funding versus a 77% aggregate level for public plans.
The report also highlights political pressure toward benefit enhancements, including for past service, that create new unfunded liabilities. It cites Rhode Island's 2025 cost-of-living adjustment, which added over $400 million in liabilities to a pension already below 65% funded. ERISA, by comparison, restricts benefit increases in plans funded below 80% (29 U.S.C. § 1083). The authors further note that many states' court-imposed restrictions lock in benefit structures for an employee's entire career, limiting changes even for future service, whereas ERISA protects accrued benefits while permitting adjustments to future accruals.
On investment and funding risk, the commentary states that many public sponsors have not set clear risk parameters for fiduciary boards, creating mismatches between funding volatility tolerance and actual portfolio risk. It points to return assumptions that remain overly optimistic in some plans, citing a National Association of State Retirement Administrators list of plans assuming returns above 7.0%, and cites CalPERS, where private equity may represent up to 40% of the portfolio. The report warns this can produce unpredictable employer contribution increases. The authors also argue that governing boards, lacking objective employer-driven guardrails, are more susceptible to mission drift toward non-financial considerations, and that politically driven investment mandates covering in-state investing, DEI, ESG, tobacco, or fossil fuels can reduce returns. They note ERISA fiduciary standards, including the Department of Labor's Interpretive Bulletin 2015-01, limit such considerations.
To address these gaps, the Reason Foundation recommends statutory ADC mandates, automatic adjustments, dedicated revenues, independent oversight, and shared contribution structures. The commentary says these mechanisms are already in use in Wisconsin, South Dakota, Colorado, Arizona, Tennessee, Utah, Michigan, Oklahoma, and Texas, and that they promote plan sustainability and reduce the risk of unfunded benefit enhancements and taxpayer burdens. The Foundation's Pension Integrity Project states it has advised policymakers in Arizona, Colorado, Michigan, and Montana.
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