Progress on State Public Pension Reforms
An independent evaluation explores Pew’s efforts to help states analyze the sustainability of their public pensions and implement reforms
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Underfunded public pensions are one of the most significant challenges facing states and municipalities today. The Pew Charitable Trusts began studying this issue more than 10 years ago, publishing some of the earliest research to detail the funding challenges confronting states. In 2010, Pew created a 50-state assessment that highlighted a $1 trillion gap between the amount states would owe retirees for pensions and health care and what they had reserved for those payments. By 2016, that gap had reached $2 trillion. Pensions alone left a $1.35 trillion hole in state balance sheets while states continued to fall short on adequately funding these promises.
Pew’s research helped draw media attention to the issue of pension reform and heighten the awareness of policymakers. In 2012, Pew began providing states and municipalities with customized analyses of their pension systems and technical assistance on exploring available approaches to improving pension policy. The goal was to support policymakers in examining and adopting policies that would shrink the funding gap and reduce risk to taxpayers while continuing to help place workers on the path to a secure retirement.
“There is no one-size-fits-all solution to the pension funding shortfalls and budgetary challenges facing individual cities and states,” says Greg Mennis, director of Pew’s public sector retirement systems project. “However, if sustainable funding is not achieved, the cost of paying for benefits will impact their ability to fund core government services such as schools, public safety, and infrastructure.”
Last year, Pew’s evaluation unit, which conducts regular assessments to help the organization learn from its work and improve future decision-making, engaged a team of independent experts to lead a review of the initiative’s progress to date. The team found that Pew’s early work on pensions was among the first to bring national attention to core concerns such as funding shortfalls and investment risk-taking, and that its ongoing research continues to help shape the national dialogue on the topic. Between March 2012 and July 2018, the initiative completed or was in the process of providing comprehensive assistance in 13 jurisdictions and had engaged seven others in a more limited way, offering support such as customized research, presentations, or public testimony. By July 2018, nine of the engagements had resulted in pension reforms that will collectively reduce the funding gap by an estimated $9.43 billion over the next 10 years. The evaluators found that, overall, Pew made substantial contributions to these state and local reform efforts.
The evaluators collected data from 10 states and municipalities in which Pew has worked, including those that have successfully enacted pension reforms and those that have not. Although each state differed in its needs and priorities, the work in Pennsylvania is a good illustration of how Pew deploys a customized approach.
From 2001 to 2012, Pennsylvania’s two major statewide pension plans swung from a $20 billion surplus to a $58 billion deficit. The growing pension burden crowded out other public investments, threatening the state’s long-term fiscal stability. In June 2012, Pennsylvania lawmakers asked Pew to testify about the challenges facing the state’s public retirement system and continued to rely on Pew’s research as they worked to understand the issue and develop a response. Pew showed that more than half of the state’s pension shortfall resulted from policy choices that increased benefits and reduced contributions to the system.
Over the next several years, Pew helped inform Pennsylvania’s restructuring efforts by educating state legislators, the governor, and other stakeholders on complex issues regarding pensions, and also analyzed various policy proposals. Pew staff provided a unique third-party perspective to negotiations, describing policy changes that other states had tried and explaining what current research showed about their effectiveness. It’s estimated that the final legislation, signed into law in June 2017, will reduce the state’s pension shortfall by between $5 billion and $20 billion over 30 years. According to the evaluators, policymakers reported valuing Pew’s objective analysis and believed that it helped persuade skeptical politicians, as well as citizens, to embrace new ways of managing the state’s retirement system. Similar opinions were expressed by interviewees in the other states as well.
Pension reform is often a highly contentious issue. By acting as a neutral arbiter, Pew created a sense of trust in the reform process among normally adversarial political actors. The evaluation identified several strengths that were key to Pew’s progress by examining successes and challenges across all 10 locations. In addition to Pew’s national research, which was a cornerstone of the work, three of the most important factors were found to be the strength of Pew’s reputation, high-quality customized research, and a flexible approach to technical assistance.
Pew’s overall reputation as a nonpartisan, credible source of information opened doors to state and local reform engagements. Many of the policymakers interviewed indicated that Pew’s reputation for high-quality research and analysis was the primary reason they invited Pew to provide assistance.
Pew’s 50-state reports helped establish its credibility in the field, and created an entry point to engage with states and municipalities. However, the national data alone were not enough to prompt local reform efforts. In response to requests from local stakeholders and elected officials, Pew developed custom, jurisdiction-specific analyses and offered recommendations that took into account local data, context, and priorities. Interviewees noted that they could count on Pew to provide a quick response to data requests when it mattered most.
The evaluation found that Pew used a flexible and personal approach responsive to the needs and preferences of local stakeholders, assisting with broader reforms such as those in Pennsylvania and Kentucky, as well as more limited reforms in places such as South Carolina, to stabilize the system and lay the groundwork for additional action. Across different locations, interviewees and stakeholder groups said that Pew’s individualized approach was important to their efforts.
In addition to conducting research and providing technical assistance, as a next step Pew has been developing and encouraging the adoption of robust new measures of fiscal health. Stress testing—a rigorous analysis that examines the potential effects of different economic conditions on a jurisdiction’s future public pension funding levels and overall fiscal health—is the most promising. Although this work remained in its early stages at the time of the evaluation, the evaluators agreed that it held great potential, and recommended that Pew continue these efforts.
Overall, the evaluators found Pew’s approach to the complex issue of pensions to be a success. Pew first laid the groundwork by providing high-quality research, which illuminated the need for reform of public pension systems. This research not only raised the issue’s visibility but helped pave the way for on-the-ground engagement to help states and municipalities strengthen their pension systems. Finally, the evaluation highlighted the need to continue identifying improvements in how the effectiveness and sustainability of pension systems are measured. The evaluation’s findings affirmed that Pew is well-positioned to continue to play a leading role in helping states and municipalities improve their pension systems.