Over the last decade, policy reforms and increased financial contributions have dramatically improved the cash flow situation of some of the country's most troubled public pension plans. Thanks to these changes, no state was at risk of pension insolvency as of fiscal year 2021. But for some states, these improvements will not be enough to provide their pension systems—and the state employees and retirees who rely on them—long-term stability.
In 2021, one-off investment returns boosted state pension funding to levels not seen in more than a decade, but recent investment deficits have wiped out most of those gains. While successful states – those with long-standing track records of stable costs and fully funding their pension obligations – have policies in place to weather financial market volatility, states that still face significant underfunding or uncertain costs need to do more to achieve true sustainability to reach.
To help policymakers navigate the uncertainty associated with pension administration and assess the resilience of their plans, The Pew Charitable Trusts has developed a 50-state matrix of financial sustainability metrics. The data in this matrix includes key indicators that show whether pension policy is sufficient to avoid bankruptcy, stabilize or pay down pension debt and manage risk.
Additionally, Pew has created custom fact sheets to complement its fiscal sustainability matrix. Data points in these fact sheets include historical outcomes of policy decisions, cash flow metrics that determine long-term solvency, and risk and uncertainty indicators. A subset of the indicators from the matrix and Pew research are presented here.
Why are the key figures important and what do they mean?
- Historical actuarial metrics form the basis of any financial assessment and show how past policies have contributed to the plans' current financial position. However, they provide little information with which to assess future investment or contribution risks. The most recently reported funding ratio – the proportion of pension liabilities offset by assets – and the change in funding ratio from 2008 to 2021 are representative of this category.
- Current financial metrics based on historical cash flows and funding patterns provide information necessary to assess whether a plan is in compliance with funding guidelines designed to reduce debt and whether a plan may be subject to bankruptcy or other forms of financial distress as a result of current guidelines is exposed. The operating cash flow ratio provides an early warning signal of insolvency risk for states where the amount by which benefit payments exceed contributions is more than 5% of pension assets. In 2021, no state's cash flow situation was below this threshold. Net amortization measures whether contributions are sufficient to prevent pension debt from growing. 29 states reported a positive or stable payback, while the remaining 21 could expect a growing funding gap due to their policies.
- Fiscal risk metrics provide important information that policymakers need when planning for uncertainties or volatile costs, and can spur reforms to ensure that pension costs do not crowd out other important public investments. The use of stress testing indicates whether a state adopts practices that would allow investment and other risks to be measured, while historical contribution volatility – the gap between the highest and lowest employer contribution rates over a given period – shows how high the pension risk is and pension insecurity have placed additional strain on the budget situation of every state.
- This fact sheet also includes the 2021 employer contribution as a percentage of payroll to show the relative impact of pension costs on public payrolls and public budgets in each state.
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