Report: Unfunded state public pension liabilities projected to increase to $1.3 trillion for FY22

(The Center Square) – Unfunded state public pension liabilities are expected to increase to $1.3 trillion in fiscal 2022 if investment returns in the stock market are 0% or less, according to a new report published by Reason Foundation’s Pension Integrity Project.

When fiscal 2022 pension financial reports are made public, the unfunded liabilities of 118 state public pension plans are expected to exceed $1 trillion in 2022, the analysis projects. The fiscal year ended June 30.

Early indicators point to investment returns averaging around -6% for fiscal 2022 for many public pension systems as stocks tumbled because of soaring inflation and other factors, according to the analysis.

A -6% return translates to $1.3 trillion in aggregate unfunded liabilities of state-run public pension plans, nearly double what it was in fiscal 2021 of $783 billion. The aggregate funded ratio of the state pension plans would fall to 75% funded in 2022 from 85% funded in 2021.

The 2022 Public Pension Forecaster, available to the public for free, allows users to preview changes in public pension system funding measurements for major state-run pension plans.

Washington state is in the best shape, the analysis found, which is more than fully funded at 107%. Wisconsin is the only other state whose pension plans are fully funded at 100%. New York (99%), Delaware (98%), South Dakota and Nebraska (93% each) are all expected to have nearly fully funded pension plans.

Hawaii is in the worst shape with an expected 58% unfunded, followed by South Carolina (56%), Illinois (52%), New Jersey (49%), and Connecticut (48%) rounding out the top five worst states.

The California Public Employees’ Retirement System (CalPERS) is expected to create a debt of more than $4,057 for every Californian if CalPERS’ investment returns come in at -6%.

If the returns are -6%, CalPERS’ unfunded liabilities would increase from $101 billion in 2021 to $159 billion in 2022, or an average debt of $4,057 for every Californian. Its funded ratio would also drop to 73.6% from 82.5% in 2021. This means state employers would have less than three-quarters of the assets they need to pay for pensions already promised to workers.

The largest public pension system in the U.S., the analysis notes, “provides a good example of how much one bad year of investment returns can significantly impact unfunded liabilities, public employees and taxpayers.”

The Teacher Retirement System of Texas is also expected to be in worse shape after having already reported $26 billion in unfunded liabilities in 2021. If it posts annual returns of -6%, its unfunded liabilities will increase to $40 billion.

Overall, Texas’ forecast isn’t looking good, Ryan Frost, policy analyst with the Pension Integrity Project, told The Center Square.

“This year’s poor investment returns will add billions of unfunded liabilities to both the public employees and teachers’ pension systems in Texas,” Frost said. “The rapid rise of pension debt and the ensuing costs to pay it down are already taking funds away from classrooms, public safety, and other state services.

“Although Texas has adopted public pension reforms to address growing debt in recent years, our projections show a -6% return for 2022 will reverse nearly all the gains made from the two plans’ historic high investment returns in 2021.”

When it comes to the third-most populous state of Florida, he said, if its state retirement system, FRS, reports a -6% return, it could erase most of the gains FRS made in 2021.

“To hedge future downturns, Florida lawmakers should lower FRS’ 6.8% investment return expectation, using a near-term market forecast number instead, so that FRS is more in line with what experts predict the market will return over the next 10-15 years,” he suggested.

The foundation argues that most state and local government pensions need to be reformed. State “pension plans, in aggregate, have struggled to reduce unfunded liabilities to below $1 trillion ever since the Great Recession, seeing this number climb to nearly $1.4 trillion in 2020,” it said.

One good year of returns in 2021 wasn’t a sign of stabilization but an outlier among several decades of troubled public pension funding, it adds, warning that “many pension plans are nearly as vulnerable to financial shocks as they were in the past.”