Public Pension Funding Ratios Modestly Increase in Fiscal 2025

The state and local pension funding ratio is projected to have increased to 77.7% in fiscal 2025, according to the Center for Retirement Research at Boston College. That ratio is up 1.5 percentage points since 2023, while the S&P Index jumped more than 40% over the same period.

Meanwhile, the National Conference of Public Employee Retirement Systems reported in its annual retirement study, released in February, that the funded level of the average public pension fund reached 83.1% through the first half of calendar 2024—a five-year high.

On Thursday, Milliman Inc. announced that June was another strong month for public pension funding: Monthly market gains of 2.3% lifted the nation’s 100 largest public defined benefit plans’ funded ratio to 82.9%.

A Boost from Slower Growth of Liabilities

The Center for Retirement Research’s report stated that the general improvement in funded status over the past two years can be attributed to two positive developments: 1) plans are becoming more realistic about defining how much they need to contribute and more consistent in paying that amount; and 2) the post-2008-financial-crisis realization of benefit cuts and slowed employment growth.

“There were many years pension funds made … changes, and it was hard to see the benefits,” says Jean-Pierre Aubry, associate director of research and co-author of the study. “They’re kind of slow-moving ships—it takes a long time to actually make the turnabout—and it feels like we’re finally hitting that fulcrum.”

The CCR noted that the actuarially required contribution rate—the rate necessary to keep the plan on track toward full funding—seems to have stabilized at about 30% of payrolls. About half of the payments cover the ongoing cost of the program, and the other half help pay down the unfunded liability.

Between 2009 and 2017, 74% of state plans and 57% of local plans made some type of reduction to their pension benefits, the report found. Since many states have legal protections that constrain their ability to alter benefits, most plans reduced benefits for new employees only. However, as of 2024, 50% of the state and local government workforce were “new hires”—defined as employees hired after 2014.

The most common benefit reductions for existing employees were increases in their pension contributions and reductions to their cost-of-living adjustments. Reductions for new employees were often increases in the age and tenure required to claim benefits, as well as longer periods used to calculate final average salary, increase employee contributions and reduce the benefit factor.

Local plans were much less likely to increase age and tenure requirements than state plans—possibly because most police and fire plans are administered at the local level, and their employee unions are especially sensitive to altering retirement ages—the report suggested.

“The combination of benefit reductions and stabilizing employment has substantially slowed the annual growth of liabilities,” the CRR report stated. “Today, liabilities are increasing at about 4 percent each year—roughly half the rate seen at the turn of the century.”

The report noted, however, that the funding gains are partially offset by “1) negative cash flows associated with maturing plans; and 2) basic growth in benefit liabilities.”

Public Plans Grow Despite Payout Obligations

For the funding ratio to have improved between 2023 and 2025, assets must have improved by more than 8%—the total growth in liabilities over that period. Pension funds only earned a 15% return on their assets over that period—much smaller growth than the increase in the stock market—because 1) one-quarter of assets are invested in fixed-income securities; and 2) a sizable share of pension investments are in alternative assets such as real estate, which struggled in the higher-interest-rate environment.

“But, even with all that, it’s still greater than the 8% growth—so you do see a modest increase in the funded ratio,” says Aubry.

Additionally, since most public sector retirement systems are “extremely mature,” they make significant benefit payments to retirees each year. Receiving fully actuarially required contributions does not cancel out public pension funds’ experience of net negative cash flows of 2% of assets each year. The cash flows reduced the growth of assets to 11% from 15% between fiscal 2023 and fiscal 2025.

“But, even if governments continue to contribute the full actuarially determined contribution and investment performance remains mostly positive, improvements in funded ratios due to two persistent features of pension funds will be modest—the annual growth of liabilities and the impact of negative cash flows, associated with mature plans, on accumulated assets,” the report cautioned.

Tags: Boston College Center for Retirement Research, Center for Retirement Research, Milliman, Milliman 100 Public Pension Funding Index