It is important that state and local governments pay at least 100% of their actuarially determined contributions (ADC) each year. The ADC is based on assumptions about how long public retirees will live, what kind of investment returns a pension fund can earn, and policies about how to backfill any shortfall in funding status, among other assumptions.
It’s kind of like getting a bill or invoice for services — actuaries for the pension fund calculate the contribution rates needed based on the rules and benefits authorized by a state or local government and then figure out what that government should pay each year to fund the benefits.
When governments do not pay their pension bill, it is an almost certain path to the creation of pension debt.
Reasons Why the Pension Bill Might Not Get Paid
Fixed Rates
Some states and cities pay fixed contribution rates into their pension funds.
For example, Mississippi pays a fixed amount of money into the Mississippi Public Employees Retirement System (PERS) each year. It does this to keep budget costs low and to maintain control over what gets appropriated into PERS each budget cycle.
In isolation, this may be a reasonable concern. However, the fixed amount is not enough to keep the system’s pension debt from growing, and the system’s actuaries recommend the state pay more to reduce the funding shortfall.
As of 2025, Mississippi PERS is critically underfunded, with a funded ratio of just 59% and over $25 billion in unfunded liabilities.
Economic Recessions
It is common for governments to reduce their payments into a pension fund when tax revenues decline.
For example, during the Great Recession of 2008-09, state tax income fell by 17% because of the slow down in economic activity, according to the Brookings Institution. This reduced the money available in state budgets by billions of dollars.
One of the common choices for states during and immediately after the recession was to reduce the amount of money paid into pension funds to balance state budgets. Depending on the situation, this may be a reasonable policy choice given various competing interests and need for trade-offs.
However, the states who followed best practice made sure to overfund their pensions in future years to make up the difference in shortchanging the pension bill in the past. Some states just went on as if they hadn’t stiffed the pension fund from the money it needed.
Pension Holidays
Sometimes pension funds achieve a funded ratio of 100%, meaning there is enough money in the pension fund to pay out all promised benefits, based on the current estimates of the value of pensions.
In these cases, state and local governments have a habit of taking holidays from paying their pension bill (which would just include payments for normal cost).
However, this can create problems because a well-managed pension plan will use assets that are more than it needs today to cover future losses and stay perpetually around 100% funding status.
Why Paying the Bill is Important
It can be very expensive and unpredictable for state and local governments to have to make pension debt payments for an extended period of time.
Failing to pay at least 100% of the actuarially determined contribution each year — the pension bill — can mire a pension system in a funding shortfall. That isn’t good for government budgets, municipal finance stability, or the retirement security of public workers.
This article is part of Equable’s Pension Basics series. To learn more about how your pension works, check out the other articles in the series:
1. How Pension Benefits Are Calculated
2. Vesting
3. The Pension Funding Formula
5. Normal Cost
6. Unfunded Liabilities (aka Pension Debt)
7. Actuarially Determined Contributions
10. Governance
11. Pension Myths & Facts: The Assumed Rate of Return Does Not Determine the Value of Benefits
12. Pension Myths & Facts: The Funded Status of Pension Plans Does Not Depend on More Public Employees
