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Funding Solution: Automatically Require Paying Pension Bills

Whether the bill is paid by the state legislature, local school districts, or both, states should pay their full pension bill every year. Experts should determine that bill using reasonable assumptions that try to minimize risks, and put the system on a path to 100% funding.

One of the most important improvements that states can make to their teacher pension funds is to create automatic triggers that require employers pay 100% of the money experts determine is necessary, especially when actuarial assumptions turn out to be wrong. If unfunded liabilities increase in Colorado, for instance, state law requires that teachers and employers increase their contributions in small steps each year until the actuarially determined contribution is being fully paid.

Some states put contribution rates directly into statute, with specific percentages of payroll to be paid. This is a bad incentive structure. It means that there are debates during each legislative cycle over whether or not to increase contributions. It would be better to have the law say the state must pay the full pension bill provided each year. If there is a fiscal shortfall, then the state can debate whether or not to cut contributions. This is a politically harder debate to win, and thus it creates momentum toward better funding policies.

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