The financial health of publicly-funded pension plans is showing improvement thanks to booming markets, as analysts warn of complacency.
"Public plans are benefiting tremendously from favorable public and private equity markets, in addition to higher, safer returns from the global interest rate environment," said Anthony Randazzo, executive director at the Equable Institute.
"The challenge for states is that this won't translate into lower contribution rates in the near-term due to unfunded liability persistence. But if state leaders interpret this year's positive returns as an excuse to slow down on contributions, then they will remain stuck in pension debt paralysis."
The comments came in conjunction with a pension health
The update's positive findings include, "the average 2024 estimated rate of return shifted to 9.5% from 7.4% after factoring in reported preliminary returns and updated private equity data for the second quarter of 2024."
Per the report, "the aggregate funded ratio for U.S. state and local retirement systems are on track to improve to 81.4% in 2024 from 75.6% in 2023 to 81.4%, based on data available through Sept. 30th, 2024. Equable Institute estimates that unfunded liabilities will total $1.29 trillion for the 2024 fiscal year, compared to $1.63 trillion at the end of 2023."
According to Equable's data, the funded ratio reached a high-water mark in 2001, when the average was 94.2%. It reached a low point in 2009 at 62.3%. The rate took a dip to the high 60's in 2020 then took off to 83.9% in 2021.
The report gives the credit for the improvement to a combination of strong market performance and record high contribution rates that have eclipsed the average 6.9% assumed return target.
Pension fund health remain an area of interest to the muni market as bond holders are sometimes second in line behind pension fund members for payback if a municipality goes bankrupt. Underfunded pension funds can also negatively impact municipal credit ratings.
Credit ratings agencies don't typically track the health of public pensions, but they do keep an eye on the states' adjusted net pension liabilities, which includes the funds needed to cover the accrued benefits of both active and retired members.
According to Moody's Ratings report from early October, "States' ability to service long-term liabilities further improved in fiscal 2023 as the sector saw moderate revenue growth, while ANPLs, the largest long- term liability for most states, declined because of higher interest rates."
The prognosis for the ANPLs for the future is also positive per Moody's. "ANPLs are expected to decrease in fiscal 2024 reporting because of higher rates and will decline further in fiscal 2025 because of higher interest rates and strong investment performance in 2024."
Moody's tracks every state and currently has Illinois at the top of the list for fiscal 2023's total long-term liabilities relative to state revenue with South Dakota at the bottom. South Dakota also has the lowest ratio of total fixed costs relative to state revenues, while Connecticut has the highest.
In May, Fitch Ratings noted that, "at least 17 states have made supplemental public pension contributions totaling approximately $27.9 billion between fiscal years 2021 and 2024, over and above routine actuarial contributions."
Fitch attributed the contributions to a combination of enormous tax revenue and federal aid the states received after the pandemic.
The positive numbers reflect a turnaround of predictions for the financial health of the nation's public pension systems. Last
