The Funded Status of Public Plans Keeps Improving – Albeit Modestly

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The brief’s key findings are:

  • The estimated ratio of pension assets to promised benefits has increased over the last two years by 1.5 percentage points to 77.7 percent.
  • This increase reflects a boost in assets from higher contributions and solid returns, and the realization of benefit cuts scheduled for new employees.
  • The impact of these positive fundamentals is partially offset by: 1) negative cash flows associated with maturing plans; and 2) basic growth in benefit liabilities.

Public Pension Funded Levels Improve Amidst Rising Interest Rates

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The brief’s key findings are:

  • Since 2019, financial markets have seen unusual turmoil, most recently a sharp rise in interest rates to curb high inflation.
  • Despite volatile asset values, the funded status of state and local pension plans has risen about 2 percentage points since 2023, and 5 points since 2019.
  • That is, the strong performance of other asset classes has more than offset the impact of rising interest rates on fixed-income assets.

Public Pensions Contend with Falling Markets and Rising Inflation

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The brief’s key findings are:

  • FY 2022 has been hard for state and local pension plans, with large investment losses and rising outlays due to inflation.
  • The aggregate funded ratio fell from 78 percent to 74 percent, negating much of the gains from the previous year.
  • The impact of rising inflation on pension finances, though, has been muted by limits to plans’ cost-of-living-adjustments (COLAs).
  • However, the flip side of limited COLAs is less inflation protection for retirees, especially those not covered by Social Security.

2021 Update: Public Plan Funding Improves as Workforce Declines

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The brief’s key findings are:

  • The aggregate funded ratio improved from 73 to 75 percent from FY 2020 to 2021. At the same time, contribution rates rose from 21 to 22 percent of payrolls.
  • While initial expectations for public pensions were low due to COVID, financial markets rebounded and municipal tax revenues were quite resilient.
  • Yet one other COVID-related factor – cuts to the state and local workforce – impacted public pension finances in FY 2021.
  • These cuts had little impact on funded status and required contribution amounts, but they do explain the rise in contribution rates, which are expressed as a share of lower payrolls.

The Status of Local Government Pension Plans in the Midst of COVID-19

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The update’s key findings are:

  • Despite the recent market recovery, during fiscal year 2020, local government pension plans will see virtually no change in their average funded ratio.
  • And, going forward, the strains on government finances due to the recession could make it harder for localities to pay their required pension contributions.
  • But projections show that local plans are quite sustainable on a cash-flow basis. Most can pay benefits indefinitely at their current contribution levels.
  • The only exceptions are the very worst-funded plans, which face the real risk of exhausting their assets.

2020 Update: Market Decline Worsens the Outlook for Public Plans

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The update’s key findings are:

  • If markets remain at their current levels through June, state and local pension plans will end FY 2020 with negative investment returns and reduced asset values.
  • As a result, their aggregate funded ratio will slip below 70 percent, and they will face higher actuarial costs going forward.
  • While this outcome is a step backwards in plans’ funding progress, most plans will have enough to pay benefits indefinitely.
  • Some of the worst-funded plans, though, do face an increased risk of exhausting their assets, and the cost of covering benefits on a pay-go basis would be very high.

Update on the Funded Status of State and Local Pension Plans – FY 2018

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The update’s key findings are:

  • The funded ratio of state and local pensions edged up to 73 percent in FY 2018, but has been largely flat for several years and is well below its peak in 2001.
  • Liability growth has steadily declined during the past two decades – from 7.7 percent in 2002 to 3.8 percent in 2018 – but asset growth has been even slower.
  • Given these trends, if plan sponsors want to improve plan funded ratios, a key challenge is to increase their asset base through contributions.
  • One way forward is to adopt more stringent funding methods such as level-dollar amortization and shorter amortization periods.
  • Another, more important, change is to lower assumed investment returns, which would help ensure funding progress by further raising required contributions.

Stability in Overall Pension Plan Funding Masks a Growing Divide

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The brief’s key findings are:

  • Under traditional accounting rules, the aggregate funded ratio for state and local pension plans in 2017 was 72 percent, largely unchanged from recent years.
  • This overall stability, however, masks a growing gap among plans: the average funded ratio was 90 percent for the top third but just 55 percent for the bottom third.
  • The plans in the bottom third are in worse shape because, on average, they receive lower long-term investment returns and pay less of their required contributions.
  • In addition, all plans face the possibility of a market downturn, which could set back funding for several years.

State and Local Pension Plans Funding Sputters in FY 2016

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The brief’s key findings are:

  • In 2016, the funded ratio of state and local pensions declined under both old and new accounting rules.
  • This decline reflected steady growth in liabilities and slow growth in assets due to poor stock performance.
  • More recently, the revival of the stock market is helping plan assets recover, with funded ratios expected to improve in 2017.
  • But, looking further ahead, funding ratios are projected to remain essentially flat due largely to the current approach of calculating required contributions.
  • Thus, to achieve more meaningful progress, plans need to establish contribution levels that will actually reduce unfunded liabilities.

The Funding of State and Local Pensions: 2015-2020

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The brief’s key findings are:

  • In 2015, the funded ratio of state and local pensions using traditional accounting rules, with smoothed asset values, rose from 73 percent to 74 percent.
  • The funded ratio using new accounting rules, with market value, declined slightly.
  • Required contributions continued to climb in 2015, but plans also stepped up their payments from 86 percent to 91 percent of the required amount.
  • The funding outlook suggests steady improvement if plans realize expected returns, but a downward drift if returns fall short, as many financial experts predict.

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