The State of Indiana’s public pension fund has become the first public fund to drop its projection of future investment returns to below 7.0 percent.

That is just one step among several big moves that the Midwestern state has been taking to improve the performance of its $26 billion retirement system.

Bad news about public pension funds has become part of our daily diet: not enough money to cover future liabilities; misuse of public funds; battles with labor unions. To mitigate some of the pain, state officials across the country are taking actions that range from changes to the funds’ investments to cutting public services and increasing employer contributions.

The state of Indiana has taken a different route to solvency, starting with the merger of its bifurcated system, agreed to by the Indiana General Assembly in 2011. Next came a decision that gave the newly integrated fund the lowest investment return assumption among 126 large public systems followed by the National Association of State Retirement Administrators (Nasra). In July 2012 the Indiana Public Retirement System became the first to drop below 7.0 percent when the newly formed 9-member board agreed that it could not expect more than a 6.75 percent average investment return on its pension assets over the next 30 years. According to a January 2011 report from Moody’s Investor Service, the Indiana state pension fund also has the second-lowest combined pension and long-term debt liability as a percentage of GDP in the country. (Only Hawaii’s is lower.)

“It’s all about risk,” explains Steve Russo, executive director of the Indiana Public Retirement System. “In almost anything we do, we ask ‘What’s the risk?’” Russo, who had previously been director of the Indiana Teachers’ Retirement Fund (TRF) since 2008, was appointed head of the merged TRF and Public Employees’ Retirement Fund (PERF) in May 2010.

Lowering a pension fund’s long-term return assumption does not come without pain. The number is important because it helps determine the future assets required to pay the ever-growing army of retirees and the allocation of investments needed to get there. The lower the assumption, the potentially greater the amount of money needed from sources other than investment returns, including employer and taxpayer contributions or public service reductions. Currently, most state pension funds have projected long-term investment returns ranging from 7 percent to 9 percent. Of those, 45 have been lowered since the 2008 financial crisis.