Annual Required Contribution (ARC)

How It Works

The ARC (renamed the actuarially determined contribution, or ADC, under GASB Statement 67/68 in 2015) has two components: (1) the normal cost, which is the present value of benefits earned by current employees during the year, and (2) an amortization payment toward the unfunded actuarial accrued liability, typically amortized over 20-30 years using either level-dollar or level-percent-of-payroll methods. Pre-2015 GASB 25/27 explicitly defined the ARC as a required funding benchmark; GASB 67/68 decoupled accounting reporting from funding policy, so the "ADC" is now the actuary-recommended contribution, and actual employer contribution may differ. When cities pay less than the ADC, the unfunded liability grows, and the investment earnings foregone on the missed contribution compound the shortfall. Consistently paying less than the ADC is a leading cause of pension underfunding. New Jersey skipped or underpaid full pension contributions for roughly two decades starting in the mid-1990s, contributing to the state's current funded ratios below 50%. Illinois historically ramped up contributions under a legislated schedule designed to hit 90% funding by 2045, but for decades funded at levels well below the actuarial standard. Kentucky Retirement Systems received contributions below ADC for over a decade, contributing to its ~16% funded ratio. By contrast, the Wisconsin Retirement System has consistently paid 100% of its ADC and maintains a funded ratio near 100%. GASB 68 requires disclosure in the ACFR of both the ADC and the actual contribution made, with the ratio (actual/ADC) shown in required supplementary information over a 10-year period. CitySpend monitors ADC funding discipline as a secondary signal within the 20% pension funding factor of the Fiscal Health Score.

Related Terms

• Unfunded Liability, The difference between a pension plan's projected liabilities (what it owes to current and future retirees) and its current assets. Also called the unfunded actuarial accrued liability (UAAL).
• Funded Ratio, The percentage of a pension plan's projected liabilities that are covered by current assets. A plan with $80 in assets for every $100 in liabilities has an 80% funded ratio.
• Defined Benefit Pension, A retirement plan where the employer guarantees a specific monthly payment for life based on years of service and final salary, the traditional government pension.