The financial health of state pension plans has worsened and advisors should avoid municipal bonds from certain issuers. Each year Cliffwater LLC prepares an annual report on the financial condition of state pension plans over time.

This year’s report covers 66 state pension plans and almost $3 trillion in assets. Following is a summary of some of the key highlights of the report, which covers the 19 fiscal years ending June 2019:

• Following the great bull market of the 1980s and 1990s, pension plans began the period almost fully funded, with a funding ratio of 96%. Unfortunately, they ended the period with a funding ratio of just 68%. (The funding ratio measures the ratio of plan assets to the net-present value of its liabilities.)
• The erosion in the funding ratio was caused to a great degree by the plans earning an asset-weighted annual return of only 5.91%, badly trailing their 7.73% collective asset-weighted actuarial assumptions.
• Other contributors to the decline in the funding ratio included the failure of some states to make required contributions, outdated mortality tables, and unfunded benefit improvements.
• Not a single individual state pension investment return met or exceeded its unique actuarial rate over the period. The average asset/actuarial return deficit was an annualized -1.87%, and the smallest deficit was an annualized -0.38%.

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