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Pension Spotlight: Risk Sharing Dilutes Pension Burden For Five States


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Pension Spotlight: Risk Sharing Dilutes Pension Burden For Five States

Pension contributions face many different risks that can quickly escalate costs because of poor market returns and reduced hiring, among other risks. Recognizing that there are many ways to spread risk through pension funding strategies, S&P Global Ratings has selected five states (Oregon, South Dakota, Tennessee, Utah, and Wisconsin) with defined-benefit plans that contain unique contribution volatility risk-sharing features and examines how these features might affect credit analysis within each state.

From simple contribution sharing to complicated variable benefit structures, the concept of sharing contribution volatility risk can take many forms, but the result is the same: Employers do not bear the entire burden of increasing pension obligation. In addition, S&P Global Ratings has observed that plans that share risks are typically better funded and more adept at absorbing contribution volatility.


Despite higher assumed returns than we would typically view as prudent (in our published guidance), all five plans are well funded. In part, this is because during periods of market turbulence, escalating costs from poor asset returns don't fall solely on the sponsor. When governments don't share these risks, they are often more likely to defer contributions to a later date to ease budgetary pressure. In some cases, these risk- isolated plans have attempted to address market volatility by reducing their assumed return, but this comes at the cost of higher, and possibly unaffordable, contributions. Plans that take on more aggressive assumptions reduce stress to the plan sponsor if they share the risk.


The Oregon Public Employees Retirement System (OPERS) administers a hybrid cost-sharing multiple-employer, defined-benefit pension plan, supplemented by a defined contribution component called the Individual Account Program (IAP).

Credit Fundamentals By Sector

  • State: Although we believe Oregon's pension liabilities remain somewhat low compared with those of peers, we expect longer term pressure stemming from increasing unfunded liabilities could weigh on the state's credit profile over time. The system's funded status has declined recently, and we expect unfunded liabilities will continue to rise.
  • Local governments: Pension costs for Oregon cities and counties remain somewhat low compared with those of peers, representing less than 10% of total governmental expenditures for the majority of the Oregon cities and counties we rate. However, the pension system's funded status has recently been declining. Increasing unfunded liabilities translate into higher pension contribution costs and budgetary pressure for municipalities, a trend we view negatively from a credit perspective.
  • School districts and community colleges: We view pension costs as manageable for the majority, although the recent trend of increasing unfunded liabilities could result in higher costs. In addition, about half of the school districts in Oregon had issued pension obligation bonds (POBs) in the early 2000s, which resulted in lower annual pension contributions at the expense of higher debt levels. Generally, we believe school districts have less flexibility in addressing increasing costs, compared with cities and counties, so rising pension costs could place downward pressure on school district credit profiles.
Contribution volatility risk is shared among active participants, employers, and the state

Most employees contribute 6% of their salary to OPERS, which generally goes to the IAP, but a law enacted in 2019 (Senate Bill [SB] 1049) redirected a portion of these contributions for those earning more than $2,500 per month. The redirected contributions go to an Employee Pension Stability Account (EPSA) to fund part of the employees' future defined-benefit accruals. This effectively shifts some of the burden of the defined-benefit costs to active participants in the future and, in our opinion, might open the door to further risk sharing. In addition, Oregon recently implemented a one-time program, the Employer Incentive Fund (EIF), to share costs with participating employers by supplementing existing side accounts that are designed to reduce future employer contributions through plan prepayments. Employers in the EIF program receive an additional state deposit in their side account for excess employer contributions, initially financed from appropriations and through sports betting. It's notable that POBs shift payments to debt as opposed to prepaying fixed costs, so they are not eligible for the EIF state addition. In 2019-2020, the EIF led to $342 million added to the OPERS trust, with $65 million matched, and represented 89 participating employers.

Assumptions and methods carry risk of contribution escalation

Employer contributions to the plan are based on an actuarial recommendation. OPERS incorporates a form of direct rate smoothing, where assets are not smoothed in the calculation of contributions, but contributions themselves are limited to an increase of 3% of payroll or 20% of the previous contribution if greater (larger jumps allowed if funded below 70%). This helps smooth budgetary impact while providing relatively quick recovery for the plan, if needed. The discount rate is higher than S&P Global Ratings' guideline, indicating an acceptance of market risk in the target portfolio that could lead to contribution volatility and possibly escalation. The amortization method assumes high growth in payroll, which defers costs based on the assumption that the budget will increase accordingly. While historical population growth might back up a high assumption in the future, there is the risk that payroll does not rise at this assumed rate, which could lead to contributions increasing faster than expected and possibly pressuring budgets. The reasonably short amortization length increases the likelihood of future contributions meeting static funding, where progress is made on paying down unfunded liabilities. However, it is still unlikely that contributions will meet our minimum funding progress (MFP) metric, meaning any progress is expected to be minimal. Last year, contributions not only fell short of MFP, but also fell short of static funding, indicating a year of regression away from full funding, which we attribute primarily to recent changes to amortization, as part of SB 1049, which are not detailed here.


The South Dakota Retirement System (SDRS) is a hybrid cost-sharing, multiple-employer, defined-benefit pension plan, with a variable benefit feature.

Credit Fundamentals By Sector

  • State: We believe that the state's accumulation and sustained level of reserves during the decade-long national economic expansion that preceded the onset of the COVID-19 pandemic positioned South Dakota to absorb cashflow volatility. Although the state's economic metrics have historically lagged those of similarly rated peers, we continue to view South Dakota's pension system as a credit strength. Evidence of the state pension system's strength involves continued strong oversight and proactive planning to ensure fully funded status.
  • Local governments and school districts: We generally do not view pension liabilities or carrying charges as a credit risk since they participate in the well-managed SDRS and contributions are affordable.
Contribution volatility risk is shared among active participants, pensioners, and employers

The active participant and employer contributions are both fixed and the cost-of-living (COLA) adjustment paid to retirees is defined each year to be equal to the rate of inflation, within 0.5% (0.0% effective July 1, 2021) and 3.5%. The COLA is further capped to maintain 100% funding in the future. If the COLA is minimized and the plan is still not fully funded, corrective actions, including possible benefit reductions, may be recommended. The cash balance supplement is called the variable retirement account (VRA) and acts as a defined contribution that can be converted to an annuity at retirement, if elected. If cumulative VRA returns are negative, SDRS assets make up the difference, a risk we view as minimal.

Assumptions and methods minimize risk of contribution escalation

The discount rate is higher than our guideline, but among the lowest in the country for large plans. The amortization method is mostly irrelevant to employer contribution volatility due to the variable benefit. We consider it likely that contributions will continue to meet our MFP metric, as they did last year, and which we view positively.


The Tennessee Consolidated Retirement System (TCRS) is composed of three defined-benefit pension plans: The agent multiple-employer Public Employee Retirement Plan, which includes the State Legacy Plan, State Hybrid Plan, and plans for each of the more than 500 local governments participating in TCRS; and the two cost-sharing, multiple-employer teacher plans. While the closed and overfunded Teacher Legacy Plan will remain an employer responsibility, the Teacher Retirement Plan as well as the ongoing State Hybrid Plan within the Public Employee Plan, are hybrid defined-benefit pension plans with a defined contribution supplement. The existence of contribution stabilization reserves reduces volatility and budgetary impact before risk-sharing features are implemented. Contributions to TCRS are initially set as follows:

  • For employees: defined benefit 5%, defined contribution 2%; and
  • For employers: defined benefit 4%; defined contribution 5%.

Credit Fundamentals By Sector

  • State: Tennessee's long-standing efforts to capitalize when favorable economic conditions were present allowed it to manage through severe economic shock starting in early 2020. Among Tennessee's long-standing practices has been to ensure fully funding the state's actuarially determined contribution--which Tennessee has met since 1972. As economic conditions revert to a measure of growth, we anticipate the state will again benefit and be among leading states in the region.
  • Local governments: We generally do not view pension liabilities as an immediate credit risk for local governments due to their strong funded, and often overfunded, status, as well as affordable contributions. Some local governments provide single-employer, defined-benefit pension plans, not administered by TCRS, but these are often adequately funded or better with limited costs.
  • School districts: Pension costs are not considered to be a fiscal pressure for Tennessee special school districts since they participate in TCRS and the Legacy Plan, both of which are well funded as of 2020.
Contribution volatility risk is shared among active participants, pensioners, and employers

The defined benefit is variable and set to maintain full funding. Pensioners share some risk, with future COLAs generally following inflation but able to be reduced if necessary. Active participants might also absorb some employer risk through contribution flexibility. If necessary, the employer may shift some or all of its 5% defined-contribution plan contributions toward the defined-benefit plan, and if this is still not enough, employee contributions to the defined-benefit plan could be increased by 1%, to 6% from 5%.

Assumptions and methods limit the likelihood of contribution escalation

The discount rate is higher than our guideline, but market risk is passed on in part to employees. The amortization method in the appendix applies only to the legacy plan and is within our guidelines, which we view positively. We believe it is still likely that contributions will meet our MFP metric in the future, as the state did last year, when contributions far exceeded it.


The Utah Retirement System (URS) is made up of multiple tiers of benefit plans. The closed "Tier 1" defined-benefit plans remain by far the largest employer liability. URS "Tier 2" plans are hybrid cost-sharing, multiple-employer, defined-benefit pension plans with a variable defined contribution feature.

Credit Fundamentals By Sector

  • State: Utah's pension profile is relatively strong compared with that of many peers. We view the state's funding discipline favorably because Utah has been funding more than its actuarially determined contribution and unfunded liabilities are low with respect to the state's population and personal income.
  • Local governments: Pension costs remain manageable for the vast majority of Utah cities and counties we rate. The size of pension contributions generally falls below 10% of total governmental expenditures, which does not reflect an overbearing burden on city and county operations in our view.
  • School districts: Of the districts that we rate, pension costs do not represent a large portion of budgets, in our view, and are unlikely to rise in the near term.
Contribution volatility risk is essentially passed on to active participants from employers

Employer contributions under Tier 2 are fixed at 10% of payroll (14% for safety). If the actuarially calculated cost is less than the fixed rate, surplus employer contributions are put into a defined contribution account for active participants. If the cost exceeds the fixed rate, the employee makes up the difference. While we believe employers might be compelled to assist in an extreme event, risk will essentially be minimized for employers when Tier 2 takes over completely, which we view as credit positive. It will be many years before the URS' Tier 2 completely takes over.

Assumptions and methods carry some risk of contribution escalation

The discount rate is higher than our guideline, so market volatility could stress employer budgets. When Tier 2 takes over, the added market risk will essentially be passed on to employees. The amortization method assumes moderately high growth in payroll, which defers costs based on the assumption that the budget will increase accordingly and is partially offset by the reasonably short amortization length. The open amortization method could slow funding progress by re-amortizing unfunded liabilities each year. Last year, contributions met our MFP metric, indicating meaningful progress toward paying down unfunded liabilities, and we expect future contributions will exceed static funding levels, indicating progress toward full funding, and possibly remain enough to meet our MFP.


The Wisconsin Retirement System (WRS) is a cost-sharing. multiple-employer pension plan that provides benefit adjustments based on fund performance.

Credit Fundamentals By Sector

  • State: We do not consider Wisconsin's pension funding to be a risk to the state because contributions are relatively small, and Wisconsin has no financial obligation for payment of any local government contributions. In our view, the state is well-positioned to manage its pension liabilities because it has one of the nation's best-funded pension plans. We believe WRS' assumptions and actuarial methods represent strong funding discipline.
  • Local governments and school districts: We generally do not view pension liabilities as an immediate credit risk due to their participation in the well-managed WRS and contributions are generally affordable.
Contribution volatility risk is shared among active participants, pensioners, and employers

Risk is shared by employers and active participants by splitting the annual cost evenly between the two as a variable contribution rate. Pensioners also share risk via annuity changes, as benefits could be increased or decreased to maintain funding, although an individual benefit will not be decreased below the original amount at retirement unless the employee has elected a higher risk/reward option available to them.

Assumptions and methods limit likelihood of contribution escalation

Employer contributions to the plan are based on an actuarial recommendation. The discount rate is higher than our guideline, indicating an acceptance of market risk in the target portfolio that could lead to volatility in contributions or pensioner benefits. WRS contributes to the plan each year with an expectation of funding a 1.9% postretirement adjustment by calculating the contribution for pensioners using a more conservative 5.0% return assumption. The amortization method assumes a moderately high growth in payroll, which defers costs based on the assumption that the budget will grow accordingly, partially offset by the reasonably short amortization length. Last year, contributions fell short of our MFP metric, but we expect that the plan will remain at or near full funding due to the variable benefit structure.


Defined-Benefit Plan Details As Per State Comprehensive Annual Financial Reports
Measurement date June 30, 2020 June 30, 2020 June 30, 2020 Dec. 31, 2019 Dec. 31, 2019
Metric (mil. $) OPERS SDRS TCRS Teacher combined URS WRS S&P Global Ratings' view
Funded ratio (%) 75.8 100 103.1 91.7 103 Poorly funded plans increase the risk of rising contributions for employers.
Discount rate 7.2 6.5 7.3 6.95 7 A discount rate higher than our guideline indicates higher market-driven contribution volatility than what we view as within typical tolerance levels around the country.
Total plan ADC 2309.2 264 610 1231 2035 Variable benefit plans with fixed contributions can define their ADC as contributions made since the benefit will change accordingly.
Total actual contribution 2309.2 264 610 1231 2035 Total contributions to the plan that were made last year.
Actual contribution as % ADC 100 100 100 100 100 Historically contributing 100% of ADC demonstrates some commitment to funding obligations.
Actual contribution as % MFP 77 111 148 100 90 Under 100% indicates funding slower than what we view as minimal progress last year.
Actual contribution as % SF 96 111 148 118 95 Under 100% indicates negative funding progress last year and expected increasing unfunded liability if this continues.
Amortization method
Period Closed Layered Closed Layered Closed Layered Open Closed Declining An open period "reamortizes" each year and indicates that, if all assumptions are met, the plan will never be fully funded.
Length (maximum years) 20 20 20 20 20 Length greater than 20 generally correlates to slow funding progress and increased risk of escalation due to adversity.
Basis Level % of payroll Level % of payroll Level Dollar Level % of payroll Level % of payroll Level percentage explicitly defers costs, resulting in slow or even negative near-term funding progress. Escalating future contributions may stress affordability.
Payroll growth assumption (%) 3.5 3 N/A 3 3 The higher this is, the more contribution deferrals are incorporated in the level percent Basis. There is risk not only of market or other adversity causing unforeseen escalations to contributions, but of hiring practices not keeping up with assumed payroll growth leading to contribution shortfalls.
Longevity Generational Generational Generational Generational Generational A generational assumption reduces risks of contribution jumps due to periodic updates from experience studies.
OPERS-- Oregon Public Employees Retirement System. SDRS--South Dakota Retirement System. TCRS--Tennessee Consolidated Retirement System. URS--Utah Retirement System. WRS--Wisconsin Retirement System. ADC--Actuarially determined contribution. MFP-- Minimum funding progress. SF--Static funding. N/A--not applicable.

Analytical Contacts For Each State
State State Analyst Email Local Government Email


Jill Legnos Li Yang

South Dakota

Oscar Padilla Joe Vodziak


Oscar Padilla Bobby Otter


Jill Legnos Li Yang


Tom Zemetis Joe Vodziak

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Todd D Kanaster, ASA, FCA, MAAA, Centennial + 1 (303) 721 4490;
Secondary Contacts:Timothy W Little, New York + 1 (212) 438 7999;
Geoffrey E Buswick, Boston + 1 (617) 530 8311;
Sussan S Corson, New York + 1 (212) 438 2014;
Jane H Ridley, Centennial + 1 (303) 721 4487;

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