Arizona’s State Retirement System Pension Debt Created by Underperforming Investments

Equable Institute
May 13 · 5 min read

Key Takeaways:

  • Arizona’s retirement system for teachers, state employees, and municipal workers has accumulated between $14 billion and $16 billion in pension debt since 2002.
  • Back in 2002, ASRS was a fully funded pension plan, but since then the primary cause of growing pension debt has been investment returns underperforming what financial experts and board members thought it would earn.
  • There is a need for state leaders and stakeholders in ASRS to discuss whether appropriate steps are being taken to address this sustainability concern.

Back in 2002, contribution rates into the Arizona State Retirement System (ASRS) from its members — teachers, state employees, and municipal workers — were a simple 2% of salary. Since then, member contributions have spiked to nearly 12%, as we highlighted in a recent Medium post. Today there are billions in ASRS unfunded liabilities — $13.9 billion in pension debt using accounting standards created by the Government Accounting Standards board, $15.6 billion according to accounting practices preferred by the ASRS pension board. This accumulation of pension debt reflects a decline in the funded status of the plan from 100% at the turn of the century to around 71% today. The Arizona system is not at risk of running out of cash any time soon, but for it to recover its funding and start to see those costs decline, everything has to go exactly right based on its current funding policy.

So how did ASRS get into this precarious fiscal position?

The Pension Integrity Project at Reason Foundation has analyzed the last several decades of actuarial reports from ASRS to uncover the answer.

Back in the 1990s, ASRS was fully funded. As the chart below shows, Arizona’s largest pension fund started to accumulate its unfunded liabilities shortly after the dot-com bubble burst.

Throughout this period, ASRS was assuming an 8% rate of return on its assets. The financial crisis certainly did not help the funded status, but pension debt was already creeping up before the financial crisis hit and continued to grow after. ASRS smoothed in the losses from the financial crisis, but by the end of the 2018 fiscal year the pension board could no longer justify such a high investment assumption and reduced the rate to 7.5%.

The lower investment return assumption also required a recognition of larger unfunded liabilities than had been previously reported under the more optimistic assumption, which is why there was a spike in the unfunded liabilities recently.

Each year, ASRS actuarial valuations provide a breakdown of the specific factors that cause its debt to go up and down. When those factors are added together, starting at the last point in time that ASRS was fully funded, it is glaringly clear what has driven this growth in pension debt: underperforming investments.

Of the $15.6 billion in unfunded liabilities today, $10.9 billion are because investment returns have been less than expected. ASRS has actually been one of the stronger investment managers for public pension funds in the U.S., but since the benchmark for success is not other pension plans or earning a positive return, this has not mattered much for the unfunded liability(other than to have prevented it from being worse). What is important for pension plan investments is that the long-term average return exceeds expectations.

Since 1979, the average return for ASRS has been 8.9% (according to data published by the pension fund). That 40-year average was driven by strong returns in the 1980s and 1990s — with most years providing returns north of 10%. And by 2002, ASRS was fully funded in part because of those strong returns.

But, as interest rates declined and market fundamentals shifted for everyone managing funds, ASRS investment experience slowed down. Since 2002, when the plan was last fully funded, the average return has been 6.3%. This is significantly below what ASRS has been targeting. And while the assumed rate of return is a long-term average, with such low performance in recent years it will be very challenging to reach even 7.5% over the long-term. Consider that in order to achieve a 7.5% average return over a 30-year period from 2002 to 2031, ASRS will need to average 9.15% for the next 13 years.

The second largest driver of ASRS’s unfunded liability has been interest on the pension debt, created by the practice of annually “re-amortizing” the whole unfunded liability over 30 years — which is kind of like resetting the mortgage on a house every year and never paying more than interest on the mortgage. Not only does this practice effectively mean never paying off the plan’s debt, it also means letting the debt pile up. ASRS stopped this practice back in 2014 (a good move for long-term sustainability purposes), and amortization payments have covered all but $1.9 billion of the“negative amortization” that interest on the debt created.

Changes to actuarial assumptions, such as lowering the assumed return, have led to the remainder of today’s unfunded liabilities. These moves generally improve the accounting methods used by a pension fund. Lowering an assumed rate of return typically means recognizing additional unfunded pension liabilities, but in reality these already existed they just weren’t recorded and accounted for on the books of the pension fund.

These findings from the Pension Integrity Project are in line with the core concerns raised by Urban Institute in their recent report on ASRS, and emphasize the need for stakeholders in ASRS to asses the long-term sustainability of the pension fund and how the overall funding policy and contribution rate structure could be improved to ensure retirement security for the plan’s members.

The Pension Integrity Project’s analysis includes a detailed assessment of overall ASRS funding in an extensive deck, which can be reviewed here.

To understand how the nuts and bolts of ASRS work, including a benefit estimator for current members of ASRS, see

To read more about growing contribution rates for ASRS, see charts created by our staff here.

Equable Institute

Equable is a 501(c)(3) non-profit working to solve complex pension funding challenges with bipartisan, collaborative, data-driven solutions, ensuring that public sector employees receive the retirement security they were promised.

Equable Institute

Written by

Equable Institute

Equable is a 501(c)(3) non-profit working to solve complex pension funding challenges with bipartisan, collaborative, data-driven solutions, ensuring that public sector employees receive the retirement security they were promised.

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