Joint Pension Committee Seeks to Phase Out Corridor Funding

Yesterday the Joint Pension Committee adopted six legislative proposals for the upcoming session, including legislation that would phase out the corridor funding method in the Teachers’ and Employees’ systems over the next ten years.  Under the proposal, which is based on a joint recommendation by the State Retirement Agency and the Department of Legislative Services, the “Board of Trustees will set contribution rates that amortize unfunded liabilities over 25 years.”  Currently, the amortization period differ.  According to the Department of Legislative Services’ State Retirement and Pension System Funding Study 2012,

The pre-July portion [of the unfunded liabilities] is being amortized over a 20-year closed period.  The liabilities for all subsequent years are amortized on separate 25-year closed periods…The proposal suggested a switch to a new, unifed 25-year closed amortization base for all past liability sets, essentially beginning the financing of past obligations anew.  The savings associated with a change in the amortization make it possible to phase-out corridor method while also reducing the employer contribution to a more manageable amount.

The corridor funding method has aggravated the investment losses of recent years and contributed to underfunding of the System.  As described, “[r]unning these large losses through the corridor rate calculations only exacerbates system underfunding. . .”

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