The markets giveth and the markets taketh away. Unfunded liabilities for state pension funds are expected to climb from $783 billion in 2021 to $1.3 trillion in 2022. The funded ratio of state pensions would fall from 85% last year to 75% in 2022.

That’s according to the Reason Foundation, which states that after the market expansion of 2021 helped pensions; the rather lackluster performance of markets this year could see an average rate of return for state pensions at -6%. Should that be the case, Reason Foundation estimates that some of the nation’s largest pension funds, California, New York, Texas, Ohio, Florida and Illinois, would see their unfunded pension liabilities jump by more than $20 billion compared to 2021.

“The nation’s largest public pension system, the California Public Employees’ Retirement System, provides a good example of how much one bad year of investment returns can significantly impact unfunded liabilities, public employees, and taxpayers,” write Zachary Christensen and Jordan Campbell of Reason Foundation’s Pension Integrity Project. “If CalPERS’ investment returns come in at -6% for 2022, the system’s unfunded liabilities will increase from $101 billion in 2021 to $159 billion.” That would equal a debt burden of $4,057 for every Californian. Its funded rate would drop from 82.5% to 73.6% in 2022, and state employers would have less than three-quarters of the assets they need to pay for pensions already promised to workers.

The significant levels of volatility and funding challenges pension plans are experiencing right now support the Pension Integrity Project’s position last year that most state and local government pensions are still in need of reform, despite the strong investment returns and funding improvements in 2021.

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