The aggregate funded ratio for U.S. state and local retirement systems is expected to improve to 78.8% in fiscal 2023 from 75.0% in fiscal 2022 when final numbers are released, according to Equable Institute’s mid-year update to its State of Pensions 2023 report, as unfunded liabilities are forecast to have declined an estimated $200 billion to $1.39 trillion over the year.

The funding growth is a turnaround from the previous fiscal year, when the national average funded ratio for U.S. state and local public pension plans declined from 83.9% in fiscal 2021.

“It’s nice to see pension fund investments rebound from losses in 2022,” Anthony Randazzo, the Equable Institute’s executive director, said in a release. “It’s particularly noteworthy as markets were still trending down at the start of the 2023 fiscal year, suggesting that pension funds used the second half of their fiscal year to make a strong recovery.”

According to Equable, as more data becomes available about fiscal 2023, it’s “clear that the investment performance of U.S. public pension funds is mixed.” Approximately half of the pension funds that end their fiscal year in June reported preliminary returns that exceeded their investment assumptions. However, that also means the other half fell short of their assumed rate of returns. According to Equable, this variance translates to an average investment return of 5.6% for public plans in 2023 as of September 30, below the national average assumed rate of return of 6.9%.

That the average return came in below the average assumed rate of return for the year is “concerning” to Randazzo, who added that “it is likely that persistent unfunded liabilities will remain a threat in the coming years unless we see significant improvements in returns or increases in contributions.”

Over the last year. U.S. state and local pension funds have faced “many mixed signals,” according to Equable, which noted that the 2022 bear market led into a community bank crash before markets rebounded into the summer of 2023.

“However, on net, investment performance of state and local pension funds fell short of important investment targets,” Equable’s update stated.

Meanwhile, a second straight month of market declines lowered the estimated funded status of the 100 largest U.S. public pension plans to 73.2% as of September 30 from 75.3% as of the end of August, according to the Milliman 100 Public Pension Funding Index.

The plans had an average investment loss of 2.6% in September, with estimated losses for individual plans ranging from a loss of 1.6% to a 4.2% loss. As a result, the asset value of the pension funds decreased $114 billion to $4.477 trillion as of September 30 from $4.591 trillion as of August 31. Of the $114  billion decrease, approximately $10 billion was attributed to a net negative cash flow. At the same time, the deficit between the assets and liabilities increased from $1.508 trillion at the beginning of September to $1.636 trillion at the end of the month.

“With this performance, another plan fell below the 90% funded mark, so that only 16 plans stood above that benchmark at the end of September,” Becky Sielman, a consulting actuary and a co-author of Milliman’s PPFI, said in a release. “At the other end of the spectrum, another two plans—for a total of 25—were less than 60% funded at month’s end.”

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