Recommendation Repeals State Pension’s Corridor Funding Method and Supplemental Contribution

In a new analysis, the Department of Legislative Services is recommending a provision be added to HB 72, the Budget Reconciliation and Financing Act of 2015 to repeal the corridor funding method and the required supplemental contribution adopted a few years ago to assist with achieving full actuarial funding of the State Retirement and Pension System (SRPS). The analysis indicates this would accomplish two significant positive outcomes,

First, it restores full actuarial funding of the State Retirement and Pension System, which not only places the system on solid financial footing but also will be seen as a positive factor by the credit rating agencies. Second, it reduces State expenditures by $71.3 million in fiscal 2016 and by increasing amounts in the out-years.

Legislation passed in 2013 to phase out corridor funding method, which specifies contribution rates based on the funding level of the combined teachers’ and employees’. The corridor funding method has aggravated the investment losses of recent years and contributed to underfunding of the System. The supplemental contribution was adopted in 2011 to assist the SRPS in achieving an actuarial funding level of 80% within 10 years by reinvesting savings generated by pension reforms also adopted in 2011.

From the analysis,

A combination of factors, including higher than assumed investment returns, the effects of the 2011 pension reforms, and the corridor phase out have substantially narrowed the gap between the amount that the State contributes under the corridor method and the amount that it would contribute under full actuarial funding. In fact, the $150 million supplemental contribution in fiscal 2016 exceeds the gap by about $70 million. As a result, it is no longer necessary to narrow that gap because that goal has already been achieved.

The proposed budget language indicates that the savings would be allocated across fund sources as follows – $59.9 million general funds, $5.7 million special funds, and $5.7 million federal funds.