Your pension is your monthly slice of the pie for life – and Funded Status is the recipe for making sure that you get every slice promised. But for the Arizona State Retirement System (ASRS), Funded Status presents some significant challenges. Here’s why it matters…

How does Arizona keep track of the pension promises made to teachers, state agency employees, and local government workers all across the state? Keeping track of the ability to make pension payments to current and future retirees starts with an important measurement: funded status.

What is the ‘Funded Status’ of ASRS?

This is a measurement of how much money the ASRS pension fund should have.

  • Pension funds have assets — contributions paid in by government employers and employees, plus investment returns made by putting those contributions into stocks, bonds, and other ways of making money.
  • Pension funds also have promises — commitments made to current retirees, and current workers who will retire in the future.

The “funded ratio” of ASRS is the percentage of assets in the fund, relative to the promises made. If a pension plan is 100% funded, that means it has all of the money it needs to pay current retirees, plus make investments that will produce future investment returns.

Unfortunately, ASRS doesn’t have all of the money it should have. This means there is an “unfunded liability” — commonly known as pension debt. Arizona’s government employers have promised $52 billion in retirement benefits… but ASRS only has $38 billion in assets. There is $14 billion in pension debt (or unfunded liabilities), and the funded ratio is 73%.

Why is it important?

Funded status helps to keep track of whether a pension fund is going to be able to pay out all of the benefits promised by a state or local government.

It is helpful to know what percentage of funding a pension plan has, because when that number starts to drop below 100%, it could be a warning sign of trouble. It is also helpful to know what the funding shortfall is as a dollar amount — because this lets us know how much needs to be paid into the pension fund at some point, to be sure benefits can be paid.

What problems could poor funded status create?

Poor funded status can lead to public pension plans freezing Cost of Living Adjustments (COLAs). This means your pension stays the same, while inflation makes it more expensive to buy the things you need.

You may also see an increase in your property taxes; as pension debt rises, taxes on all property owners often increase. Whether you’re working or retired, this means less money for everyday living.

Other public programs can also suffer. Funding for roads, schools, parks, municipal programs, and more are being cut as pension debt takes a bigger bite from public budgets.

What is a healthy funded status?

Pension plans are designed to be 100% funded. That should be the target of Arizona or any other state with a pension plan.

Why? The whole point of setting up a pension fund in the first place is to put money aside (contributions from governments and employees as participants) and invest that money, using the investment returns to help pay future benefits. In this way, governments are “pre-funding” the benefits they’ve promised.

So when ASRS has less than 100% of the money needed — like right now — there isn’t enough money from the pension fund in the financial markets to earn investment returns.

Is it okay if the funded status is just 80%?

Not really. For a year or two, it isn’t a problem if your state’s pension plan isn’t 100% funded. But low funded status shouldn’t be permanent.

The value of pension funds can fluctuate from year to year. Even after a big financial crash, markets tend to bounce back. In fact, some of the best investment returns for pension funds happened in the years right after the Financial Crisis of 2008-09. So it’s reasonable that funded status will fluctuate over time.

But being continuously around 80% funded isn’t good enough. And for two reasons:

  • First, pension debt payments are expensive for Arizona, and are taking money away from investing in roads, parks, or education. For example, last year, school districts spent $1.1 billion on pension debt payments, amounting to $929 per student; total per student spending in 2018 was $5,594, meaning nearly 17% of all K-12 spending was on pension debt. This is bad just for one year… but doing it every year can create really terrible outcomes for society.
  • Second, the assets of a pension fund are not only to pay current retirees. They are also supposed to be invested to earn returns that will be used to pay future ASRS retiree benefits. Staying at a poor funded status forever, means keeping future retirees constantly at risk of not getting all promised benefits.

When should I be worried about the funded status in my state?

Right now. The last time the Arizona State Retirement System was fully funded was 2002. That is nearly two decades of persistent pension debt.

Once the funded ratio of a pension fund drops below 90% for two or three years in a row, that is a warning sign that something isn’t exactly right. ASRS reached this point back in 2005.

Having a funded ratio between 70% and 90% for several years in a row means that unfunded liabilities are persisting. And just like carrying credit card debt for a long time, the longer that a state takes to pay off its pension debt, the more expensive it will be in the long-run.

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Want to read more?

– See Equable’s series on Pension Basics, including an article about Funded Status.
– Take a look at Equable Institute’s paper on how the ASRS contribution rate just keeps going up and without an end in sight.
– Read Equable Institute’s analysis of how ASRS cost increases are “crowding out” education funding.
– Check out Urban Institute’s paper analyzing the risks that ASRS faces for the future.
– Head over to TeacherPensions.org to read their blog post on how ASRS benefits work.
– Review Fitch Ratings Agency’s conclusion that Arizona has the riskiest pension investments in the country.