Legacy Debt in Public Pensions: A New Approach

SLP#84

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.

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