Public Pension Plans' Long-Term Fiscal Health Varies Widely Across States
A decade of increasing pension contributions and the strong stock market rally of 2021 have combined to help stabilize state pension funds. As a result, pension plan assets have risen by more than half a trillion dollars since 2011, leading to a 50-state funded ratio—the share of pension liabilities backed by plan assets—of more than 80%, the highest since the 2008-09 recession. And total unfunded state pension obligations were less than $800 billion at the end of fiscal year 2021, the greatest progress in closing the state pension plan funding gap—the difference between plan liabilities and assets—this century.
However, not all state pension funds are approaching long-term fiscal sustainability, defined as government revenue matching expenditures without a corresponding increase in public debt. As part of a larger project to develop a fiscal sustainability matrix highlighting the practices of successful state pension systems and presenting critical 50-state data that facilitates comparative analyses and plan assessments, The Pew Charitable Trusts is producing individual state fact sheets. The data points in these fact sheets include historical outcomes from policy choices, measures of cash flow that determine long-term solvency, and indicators of risk and uncertainty.
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Although no one metric can tell the whole story, together these measures offer a comprehensive view of state pension funds’ fiscal sustainability:
- Funded ratio—the value of a plan’s assets in proportion to the pension liability—and change in funded ratio over time highlight the role of past policies in a plan’s current financial position. These historical actuarial metrics are the foundation of any fiscal assessment but provide little information to assess future risks.
- Operating cash flow ratio and net amortization are plan financial metrics that indicate whether current policy is working effectively to avoid fiscal distress and reduce debt. Operating cash flow ratio captures the difference between contributions made to and benefits paid from a plan as a portion of total plan assets. And net amortization measures whether total contributions would have reduced unfunded liabilities had all actuarial assumptions—primarily expected investment returns—been met for the year.
- Historical contribution volatility (the range between the lowest and highest employer contribution rate over a fixed period) and regular pension stress testing (analyses of plans’ fiscal health under different investment scenarios) help policymakers plan for future uncertainty and cost volatility. Because state and local budgets often bear the brunt of risks taken on by public pension plans, such state budgetary metrics are essential for long-term planning and can prompt reforms where needed.
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