State and local governments fund pensions based on the projected returns and number of active members and beneficiaries. Essential elements of funding practices include:
- Actuarial cost method – A technique used to estimate the total present value of future benefits over an employee’s working career (normal cost/service cost).
- Asset smoothing method – A technique used to recognize gains or losses in pension assets over some period of time so as to reduce the effects of market volatility and stabilize contributions.
- Amortization policy – The length of time and the structure selected for increasing or decreasing contributions to systematically eliminate any unfunded actuarial accrued liability or surplus.