Treasury says pension reforms are improving funded ratios and projects $6 billion in savings

At a legislative appropriations committee hearing, treasury officials reviewed multi-decade pension funding trends and the effects of recent reforms, saying the systems’ funded ratios have risen in the last four years and quantifying approximately $6 billion in taxpayer savings tied to benefit and funding changes.

Committee staff framed the background: the Great Recession and a decade-long decline in funded ratios moved the state retirement system from about 94% funded before the recession to roughly 66% afterward, and moved the teachers’ system from about 81% to about 51% by 2020. A 2020 experience study reduced the assumed rate of return from 7.5% to 7.0%, which increased reported unfunded liabilities and the actuarially determined employer contribution (ADEC).

The presenter summarized the legislative and administrative response. Act 75 created a benefits-design and funding task force, whose recommendations were implemented in Act 114. That package included a one-time state payment, ongoing additional ADEC-plus contributions, increased member contributions, benefit changes such as a delayed COLA trigger, and an explicit pre-funding program for other post-employment benefits (OPEB).

Using those policy changes and adjusted assumptions, treasury staff said both systems have seen several consecutive years of improving funded ratios: the state system that fell to the mid-60s after the recession is now roughly 71% funded, and the teachers’ system has risen from about 50% in 2020 to over 60% today. The office estimated the systems are on a trajectory to eliminate their unfunded liabilities by about 2038, with OPEB prefunding targeted toward elimination by about 2048.

On dollar impacts, the office presented a $6 billion figure of taxpayer savings tied to Act 114 and related actions. The office attributed about $1 billion of that to benefit changes and higher member and employer contributions (the presenter broke that $1 billion into roughly $580 million coming from employer/employee contributions and about $400 million from benefit adjustments). The remaining roughly $5 billion was described as accelerated one-time payments and the effect of pre-funding OPEB.

Treasury staff said pre-funding OPEB is an important driver of long-term savings because investments can earn returns to help pay retiree health benefits; they noted preliminary market earnings as an early example — roughly $32 million earned in fiscal 2024 on OPEB prefunding assets. The office cautioned that those OPEB funds are being pre-funded now and are not yet paying benefits.

Officials and committee members discussed operational details. Tim Duncan, identified as from the treasurer’s office, explained that ADEC contributions are appropriated by the legislature and that those appropriations cover current benefit payments while leaving additional money invested for the future. Committee members asked for membership counts across systems; staff said total membership (actives, deferred, retirees) is roughly 20,000 for the state system, about 25,000 for teachers, and about 19–20,000 for municipal systems, with roughly 10,000–12,000 current retirees drawing benefits in each major system.

Treasury staff reiterated key risks and caveats: market performance remains a material risk, and poor returns in a single near-term year could increase budgetary pressure in the final years of the payment schedule. They recommended staying the course with the mix of one-time payments, increased ongoing contributions, benefit design changes and OPEB prefunding as the prudent path to the 2038/2048 targets.

Committee members requested additional materials cited in the presentation, including the office’s November snapshot to the joint pension oversight committee and the detailed quantification of the $6 billion savings.

The session included follow-up questions about a waterfall mechanism created by Act 114 that directs portions of certain reserve transfers to budget reserves, the state pension fund and a teachers’ “post-retirement adjustment allowance” account (the presenter referred to this account as the teachers post-retirement adjustment allowance account). Staff noted that the teachers’ account was funded with about $9 million in 2024 and that full COLA restoration is contingent on reaching 80% funding and adequate balance in that account.