Despite registering an average annual investment gain of 10.3% and raising funded ratios by nearly five percentage points in 2024, public pensions remain in a “fragile state,” according to the Equable Institute’s State of Pensions year-end report.
In 2024, state and local pension funds easily outperformed their average assumed rate of return of 6.87% and raised their funded level to 80.2% from 75.5%. However, according to the report, those figures belie the facts that the robust returns still underperformed many public equity indexes and that funded levels are still too low. Despite the gain, 2024 was the 17th straight year public pension funds’ average funded ratio remained below 90%, which Equable considers the minimum threshold for pensions to be deemed resilient.
“The good news for state legislatures and local government employers is that three straight years of improved funded status for public plans prevented additional unfunded liabilities from piling up,” the report stated. “The bad news is that there is still more than a trillion in pension debt that can’t be paid down using today’s level of contributions.”
The report added that “the need for contribution rate increases remains as urgent as ever, irrespective of the budgetary pressures this creates.”
A 2024 issue brief from the National Association of State Retirement Administrators found contributions made by state and local governments to pension trust funds in recent years accounted for 5.1% of all non-federal spending. Between 1994 and 2023, pension fund revenue was derived 28% from employer contributions, 11% from employee contributions and 61% from investment earnings, NASRA reported.
Investment returns for the plans in 2024 varied widely, ranging from 5.1% to 21.2%, while pension funds that ended their fiscal year on September 30, 2024, had the best average returns, at 18.9%. The Equable report also stated that approximately 91% of plans beat their assumed returns for fiscal year 2024.
The strong financial market returns in 2024 were not enough to quell concerns about whether governments are willing to move away from high risk/reward investment strategies toward more “realistic long-term investment assumptions,” the report stated. Despite average assumed rates of return remaining relatively unchanged over the past four years, the current 6.87% average rate is “higher than what should be considered reasonable today,” which Equable identified as between 5.5% and 6.5%.
“The trend of adopting more realistic assumed returns over the decade before the Covid Pandemic has stalled,” the report stated.
Additionally, public pension funds’ valuation risk is at a “all-time high,” according to the report, which found 27.7% of pension assets are allocated to private equity, real estate and other alternative investments that rely on non-public valuation methods to record performance data.
The report also held that if tax revenues are stagnant this year, state legislatures “are unlikely to seriously improve how they finance pension debt,” which they could do by making “realistic assumptions and payment plans that don’t budgetarily burden local employers like school districts.”
STATES RANKED BY 2024 FUNDED RATIO | ||||||||||
Rank | State | Funded | Unfunded Liability | Rank | State | Funded | Unfunded Liability | |||
1 | District of Columbia | 112.5 % | -$1,403,077,888 | 42 | South Carolina | 69.0 % | $21,754,329,088 | |||
2 | Nebraska | 108.5 % | -$1,619,958,016 | 43 | North Dakota | 68.9 % | $3,408,814,592 | |||
3 | Tennessee | 107.9 % | -$5,273,603,584 | 44 | New Mexico | 67.8 % | $16,547,076,096 | |||
4 | Utah | 104.2 % | -$2,085,706,112 | 45 | Vermont | 66.5 % | $3,264,627,200 | |||
5 | Washington | 102.5 % | -$3,891,787,776 | 46 | Connecticut | 63.5 % | $33,233,213,440 | |||
6 | Wisconsin | 102.1 % | -$3,008,134,144 | 47 | Hawaii | 63.2 % | $13,875,644,416 | |||
7 | West Virginia | 100.4 % | -$81,263,616 | 48 | Mississippi | 57.0 % | $25,755,031,552 | |||
8 | South Dakota | 100.0 % | $0 | 49 | New Jersey | 56.6 % | $91,114,946,560 | |||
9 | Minnesota | 93.2 % | $7,086,123,008 | 50 | Kentucky | 54.1 % | $38,533,578,752 | |||
10 | New York | 92.8 % | $50,920,734,720 | 51 | Illinois | 51.6 % | $211,680,788,480 | |||
* Funded ratios are the aggregate of all statewide retirement systems and large municipally managed plans. Data is based on actual reported financial and Equable estimates based on benchmark returns for reported asset allocations. Source: Equable Institute | ||||||||||
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