Public Pension Funding Levels Improve in Second Quarter 2021
The stock market's strong performance in the second quarter of 2021 helped the top 100 U.S. public pension plans improve their funding status, according to a report by the actuarial firm Milliman, Inc. This continues an upward trend in public pension funding levels that is now in its fifth quarter.
Public pension funded ratios increased from 79.0 percent at the end of March 2021 to 82.6 percent at the end of June 2021. Industry guidelines generally recommend that pension plans maintain a minimum 80 percent funded ratio as a financial goal. Milliman notes that the top 100 funded status has not achieved the 80 percent level since it started tracking this number in September 2016.
Funding levels for the top 100 U.S. public pension plans break down as follows, according to the Milliman report:
• 39 plans have funded ratios higher than 90 percent
• 44 plans have funded ratios between 60 and 90 percent
• 17 plans have funded ratios lower than 60 percent
Pension deficits among the top 100 largest U.S. public pension plans declined from $1.166 trillion at the end of March 2021 to $975 billion at the end of June 2021.
Industry experts are monitoring the following conditions triggered by the COVID-19 pandemic to estimate their future impact on public pension funding:
• Higher death rates and decreased life expectancy
• Fluctuations in pension funding levels due to job losses and furloughs
• Changes in state revenue levels and a state's ability to pay annual required pension contributions
• Continued low interest rates, which result in lower yields on fixed income investments
States with the highest funded ratios according to 2018 data from the Pew Research Center are as follows:
• South Dakota, 100 percent funded
• New York, 98 percent funded
• Wisconsin, 96.5 percent funded
• Washington, 93.9 percent funded
• Idaho, 92.4 percent funded
• Nebraska, 90.3 percent funded
States with the lowest funded ratios according to 2018 data from the Pew Research Center are as follows:
• New Jersey, 38.4 percent funded with a $130.7 billion pension deficit
• Illinois, 39 percent funded with a $140.6 pension deficit
• Kentucky, 44.9 percent funded with a $28.6 pension deficit
• Connecticut, 47.7 percent funded with a $35 pension deficit
Illinois plans a $9.4 billion contribution to the state's five pension plans in the 2022 fiscal budget, according to PI Online. The state recently got the benefit of two credit rating increases from the previous near junk level, even though Moody's estimates that the current year pension deficit in Illinois is over $300 billion.
New Jersey is also taking important steps to shore up its pension funding levels. The state announced in July 2021 that it contributed $5.8 billion to the $90 billion public-worker pension fund for the new fiscal year that began on July 1. The state expects to contribute another $1.1 billion in revenue from the New Jersey Lottery to the pension fund over the balance of fiscal year 2022. New Jersey is also moving toward reducing its annual rate of return from 7.3 percent to 7.0 percent by 2022.
Mark Johnson, Ph.D., J.D., is an experienced pension and ERISA expert. As a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 company, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert consultant and witness on 401(k), ESOP and pension fiduciary liability; retiree medical benefit coverage; third party administrator disputes; individual benefit claims; pension benefits in bankruptcy; long term disability benefits; and cash conversion balances. He can be reached at 817-909-0778. ERISA Benefits Consulting, Inc. by Mark Johnson provides benefit consulting and advisory services and does not engage in the practice of law.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.