Most state and municipal public pension funds are distressed or fragile, with funded ratios of less than 90%, according to the Equable Institute’s State of Pensions 2023 report, a year-end update.

The report used the last reported data available from public pension funds. The report noted that at least 33 funds have not released year-end fiscal 2022 data. The report tracked 232 pension funds in the U.S.

“Funding improvement in 2023 is both welcome and disappointing,” said the Equable Institute’s executive director, Anthony Randazzo, in a press release. “We are more than 15 years on from the financial crisis, lived through a zero-interest rate-fueled bull market, seen investments recover from a COVID shock, and watched public plan asset allocations shift steadily into alternatives like private equity and real estate—and still, the national average funded ratio is tepid with little sign that a strong recovery is on the horizon. Instead, we are seeing increasing valuation risk for public plan assets, a further search for investment returns by expansion into private debt, all while the total effects of inflation on pension funds are not yet fully known.”

At the end of fiscal 2023, the average funded ratio for public pension funds in the U.S. was 78.1%, up from 74.9% in fiscal 2022. Only six states/or jurisdictions had fully funded pensions (funded status above 100%): South Dakota, Wisconsin, Washington, Tennessee, Utah and Washington, D.C.

Despite the gain, the overall funding status is still down from a high of 94.4% in 2001. Funded statuses declined sharply after the financial crisis of 2008 and 2009, dropping to 62.4% in 2009 from 92.4% in 2007.

The states with distressed status, which Equable defines as a funded status lower than 60%, include South Carolina (59.9%), Connecticut (57.8%), New Jersey (53.5%), Illinois (50.9%) and Kentucky (50.1%).

The report described pension funds with funded ratios of less than 90% as fragile. Only pension funds in 10 states and districts are considered neither fragile nor distressed, including the fully funded states, plus Nebraska, Wyoming, West Virginia and New York.

With most pension funds not fully funded, unfunded liabilities stand at $1.4 trillion as of fiscal year-end 2023, down from $1.6 trillion at the end of fiscal 2022, a high for unfunded pension liabilities. According to the report, state and local pension funds held $5.12 trillion assets, as of fiscal 2023.

The average fiscal year return for all pension funds in fiscal 2023 was 7.4%, higher than the average assumed rate of return of 6.9% for the year. According to the report, 53% of pension funds beat their average assumed rate of return, with actual returns ranging from negative 4.1% to 13.3%.

Read more @ai-cio