Despite revenue growth and strong investment returns, the public pension funding gap for all 50 states still exceeded $1 trillion in 2017, as some states rebounded while others struggled, according to an issue brief released Thursday by The Pew Charitable Trusts.
The national pension funding deficit was $1.28 trillion in 2017, the most recent year with complete data. That is down from $1.35 trillion in 2016, due to investment returns of 12% for the median plan. Over the same period, employer contributions fell $28 billion short by actuarial funding standards, Pew found.
Post-recession, eight states rebounded to an average funding ratio of 95% in 2017, while the 20 least-funded states declined to 56% funded from 76% in 2007.
The worst-funded states — Kentucky, New Jersey and Illinois — had less than half the assets to cover liabilities in 2017, Pew found.
The successful states, led by Wisconsin, South Dakota and Tennessee, had the best-funded plans in part because they paid 100% of the actuarial recommended contributions. They also have policies to lower benefits or raise contributions when there are market downturns, resulting in stable contribution rates.
The report also notes that strong investment returns due to high allocations of stocks and alternative investments also increase public plans' risks and volatility. Based on investment returns since 2017, Pew estimates that the national funding deficit for public plans would hit $1.5 trillion as of December 2018 once that data is measured.
More states are realizing the importance of implementing policies to manage risk, and some are doing or considering further stress testing, David Draine, senior officer with Pew's public-sector retirement systems project, said on a press briefing call.
