American public pension funds are facing serious challenges that threaten the retirement plans for millions of US state and local government employees.

Pension plans remained severely underfunded during the 11-year bull market that followed the Great Recession. The plunge toward insolvency and high-return markets led fund managers to take on risky bets in hope of staying afloat. Now, the recent selloff has left funds struggling to keep up with their future obligations.

The 100 largest public pension funds in the United States had been funded at just 78.6% of their total obligations at the close of the second quarter, down from 85.5% at the end of 2021 according to analysis by Milliman, an actuarial and consulting firm. The funds lost a whopping $220 billion between March and April alone as Russia’s invasion of Ukraine roiled markets.

Public pensions are borrowing increasing sums to meet their payout obligations. Nearly $13 billion in pension obligation bonds were sold in 2021, more than in the past five years combined. Now, they’re taking on more risk by investing that leveraged money.

The California Public Employees’ Retirement System (CalPERS), which manages the largest public pension fund in the United States, with about $440 billion in assets under management, began leveraging some of its debt this month.

“We need every arrow in the quiver we can get, and private debt is one of the critical ones,” said Dan Bienvenue, CalPERS’ deputy chief investment officer. “There isn’t a no-risk choice.”

The Teacher Retirement System of Texas, the country’s fifth-largest public pension fund, has also used leverage funds since 2019.

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