Legacy Debt in Public Pensions: A New Approach

The brief’s key findings are:

• The inclusion of “legacy debt” – unfunded liabilities from long ago – with current liabilities impedes effective pension policy.
• A new approach would separate legacy debt from other unfunded liabilities in order to:
  • spread the legacy cost over multiple generations; and
  • properly identify fixed vs. variable costs.
• It would also use the municipal bond yield – rather than the assumed return on assets – to calculate liabilities and required contributions.
• This approach, by properly allocating costs, would improve intergenerational fairness, government resource decisions, and public credibility.