articles Ratings /ratings/en/research/articles/181030-u-s-state-pensions-struggle-for-gains-amid-market-shifts-and-demographic-headwinds-10746923 content esgSubNav
In This List

U.S. State Pensions Struggle For Gains Amid Market Shifts And Demographic Headwinds


ESG U.S. Public Finance Report Card: California Governments And Not-For-Profit Enterprises


Table Of Contents: S&P Global Ratings Credit Rating Models


History Of U.S. State Ratings


U.S. State Ratings And Outlooks: Current List

U.S. State Pensions Struggle For Gains Amid Market Shifts And Demographic Headwinds

(Editor's Note: This commentary, published Oct. 30, 2018, had an error in chart 6. A corrected version is below. )

In the decade since 2008, when pension funds in the U.S. reported steep investment losses, overall state pension plan funding levels stabilized but have still not fully recovered to pre-recession levels. Although reported levels before the recession were based on actuarial funding and are not fully comparable with today's Governmental Accounting Standards Board (GASB) reporting standards, the average reported pension status across state plans of 70% in fiscal 2017 is well below the average 83% actuarial ratios reported in 2007 (see "Market Declines Will Shake Up U.S. State Pension Funding Stability," published Feb. 26, 2009, on RatingsDirect). Relatively slow economic growth and weak investment returns in select years, adjustments to actuarial assumptions, and maturing pension plan populations have played into reported funded levels that seem stuck in the mud. Furthermore, ongoing stock market volatility in October 2018 raises questions about how some state pension plans are currently positioned to manage through any future market turmoil. In the five years from 2012 to 2017, many of the states' largest pension plans have not changed their target investment allocations in equity, real estate, and alternative asset classes, with a median 70% allocation in these generally more volatile asset classes. However, retiree counts in many plans are growing in relation to new and existing employees, which together with state pension plans' heightened exposure to market volatility and in the context of volatile state revenues and rising fixed costs, raises the stakes for greater potential fiscal stress and credit deterioration in the next recession. (See "When the Credit Cycle Turns, U.S. States May Be Tested In Unprecedented Ways," published, Sept. 17, 2018.)

This year's S&P Global Ratings' annual state pension survey found most state pensions reported slight improvement in funding levels in fiscal 2017 mainly due to solid investment returns as of June 30, 2017 (an average of 12.6% for the states' largest plans). The fiscal 2017 aggregate median reported funded ratio of 69.5% for states was up just slightly compared with 68.0% in fiscal 2016. However, as we predicted in last year's survey, we note more than a third of the states' largest plans lowered their rate of return assumption in 2017, which has played into relatively flat reported funding levels.

According to a report by Wilshire Trust Universe Comparison Service, the median public defined pension plan return was 8.55% as of June 2018, slightly below an average return of 12.4% as of June 2017. We believe solid investment returns as of June 30, 2018, in addition to some states' ongoing actions to adjust contribution levels to improve funding trajectories, will likely lead to stability in reported state pension funding in fiscal 2018. However, we also believe that any improvement could be short-lived if recent market volatility persists and shrinks investment returns.

Demographic Trends And Investment Volatility Could Increase States' Costs

The median fixed costs, including pension, other postemployment benefits (OPEB), and debt service, total about 11% across states. This percentage is relatively manageable, particularly when compared to the average fixed costs of 26% across the largest U.S. cities (see "Pension Costs Will Remain High For Largest U.S. Cities, As Revised Liability Measures Place Upward Pressure On Contributions," published Sept. 5, 2018). However, when mandatory Medicaid costs are included, the median fixed costs for states rise to 31% of budget (see "When the Credit Cycle Turns, U.S. States May Be Tested In Unprecedented Ways," published Sept. 17, 2018). We also see certain trends that are likely to raise states' pension and OPEB costs and competing priorities that could cause budget pressure.

Demographic trends among states with aging populations and minimal growth can deal a double blow to pension costs. Plans with rising numbers of retirees compared to active employees will need to manage assets for liquidity to meet increasing beneficiary payouts or rely more heavily on employer contributions to make up for potential investment losses. A greater proportion of retirees typically indicates a larger pool of assets to fund their benefits, leaving plans more vulnerable to investment swings than ever before. Furthermore, many states set contributions to rise over time with anticipated payroll increases; however, with weaker-than-assumed payroll growth they will likely see higher future costs as plans lower current assumptions to align with experience.

Most states that fund pensions on an actuarial basis use a valuation of assets, which smooths market returns over a number of years to help minimize year-to-year fluctuations in pension costs. However, severe stock market volatility could lead to longer-term strain for state budgets. Even as state plans have been lowering discount rate assumptions, many are often only lowering the embedded inflation assumption while projecting higher real returns and taking on more risk. In the event of a market downturn, reported funding levels could fall substantially, and while subsequent annual increases to employer contributions would be gradual and phased in, state budgetary costs would grow over time, causing credit pressure.

Plan Investment Allocations

We find that targeted investment allocations of the states' largest pension plans in equity, real estate, and alternative investments are relatively high but have remained stable overall in the previous five years. Still, some state plans are vulnerable to equity sell-offs. Using reported plan investment allocations from 2012 to 2017 (found on the Public Plans Database website maintained by the Center for Retirement Research at Boston College or in plan reports), the median proportion of the portfolio target allocation among high-risk assets (equities, real estate, and alternatives including commodities) in the largest pension plans across states was 70% in 2017, unchanged from five years earlier. These targeted allocations are also higher than the average 62% target allocation to high-risk assets by state and local pension plans in 2001.

In chart 1, state plans appearing high in the chart reflect higher relative target asset allocations in the high-risk assets in fiscal 2017 compared with the peer median of 70%. However, some state plans have continued to increase targeted allocations to these more volatile asset categories while others have pulled back. The state plans appearing farther to the right in the chart have seen target allocations migrate to riskier assets compared with five years ago. The size of the bubbles reflects the plan's respective funded ratio and the colors signify the relationship between the plan's actuarial assumed long-term rate of return and the median assumed rate of 7.5% in fiscal 2017. Red bubbles reflect assumed rates of return that are more optimistic than the median, and blue bubbles reflect assumed rates that are more conservative than the median.

We did not characterize targeted investments PPD categorized as hedge funds as high risk, since a hedge strategy is inherently meant to limit volatility; however, there is often limited disclosure for these investments and hedge fund composition could lend to greater asset volatility in certain cases. If hedge funds were included in the high-risk asset grouping, the largest state plans' median allocation rises to 77% in 2017 from 73% in 2012.

Many plans continue to lower these assumptions as reflected in the National Association of State Retirement Administrators 's (NASRA) June 2018 public fund survey*, which finds rate of return assumptions across state public pension plans decline to a median 7.45% and average 7.32% in fiscal 2019. However, as we note in our article, "The Increasing Cost Of Governmental Pensions: Discount Rate And Contribution Practices" (published Sept. 27, 2018) , on average, plans are actually assuming higher real rates of return because nominal rates have not declined at the same pace as the assumed inflation rate--and this leads to greater market volatility risk. Furthermore, demographic trends coupled with volatile asset returns across state plans could intensify eventual pension cost increases and cause credit pressure for states. Those plans with relatively elevated high-risk allocations, optimistic assumed rates, and lower funded ratios are particularly vulnerable.

Chart 1


Demographics And Aging Plans

As a plan matures, fewer active members contribute annually and retirees and beneficiary counts rise. Such a plan generally relies more on its assets and/or employer contributions to maintain funding status. Furthermore, a plan with an aging population will likely need liquid assets to draw on for beneficiary payments. Therefore, in a downturn and assuming a limited ability to significantly adjust benefits, plans with market losses must rely more heavily on increases to employer contributions rather than to active member contributions.

In chart 2, plans that show up the farthest to the left are relatively mature with active member-to-beneficiary ratios that fall below a median of 1.3 across the states' largest plans. As before, state plans found at the top of the chart reflect higher relative target asset allocations in the high-risk assets in fiscal 2017 compared with the peer median of 70%. Plans that are both mature and target risker asset allocations could expose states to higher relative future costs in the event of a market downturn.

In our article, "U.S. States Are Showing Their Age: How Demographics Are Affecting Economic Outlooks," published Sept. 25, 2018, we highlight how demographic and population trends among prime working-age adults correlate with economic outlooks across states. Similarly, weak demographic trends and aging populations in certain states do not support plan assumptions that rely on relatively high payroll growth. In many cases, pension plans must reexamine current average assumed payroll growth rates that exceed rates of inflation. We believe many plans are likely to move to lower these payroll growth assumptions in the future, which will also contribute to higher pension costs for certain states.

Chart 2


Survey Results

Our survey results incorporate reported pension liabilities under GASB Statements 67 and 68. Based on plan information reported through the end of fiscal 2017, our survey reflects a stabilization of reported funded levels across most states compared with the previous year (see chart 3). Overall, growth in market returns that outpaced liability growth marginally improved median funded ratios reported across all states to 69.5% in fiscal 2017 from 68.0% in fiscal 2016.

In addition to the better investment returns, changes to a state's funding trajectory and corresponding fluctuations in the single GASB discount rate will also influence swings in reported funding ratios. For example, Colorado State Division used a much lower 5.26% GASB single discount rate as of Dec. 31, 2016, compared with its 7.5% assumption in the previous year, contributing to a one-year decline in its reported funded level to 42.6% from 56.1%. Of note, in 2018, the Colorado state legislature passed a bill to adjust certain eligibility and benefit increases as well as increase pension contributions to the plan, which we believe will help stabilize the state's funding levels in the near term and that contributed to our revised outlook to stable for the state in June (see our full analysis on Colorado, published June 7, 2018). Swinging in the other direction, Minnesota State Employment Retirement System's stronger investment returns in fiscal 2017 lent to improvement in the fund's single GASB rate to 5.42% in fiscal 2017 from 4.17% in the previous year and boosted its reported funding status to 62.7% from 47.5%. Minnesota's legislature subsequently passed a bill to reduce the plan's assumed rate of return and increase statutory employer and employee contributions to the plan, which we believe should also help stabilize the plan's funding trajectory and funded status. (See "Minnesota's New Pension Bill Is A Positive Step Toward Sustainable Funding," published June 7, 2018.)

Chart 3


Fiscal 2017 State Pension Funded Ratios

Overall reported pension funded ratios across the states vary widely. As illustrated in tables 1 and 2, Wisconsin, South Dakota, New York, and North Carolina continue to rank among the states with the best reported funded ratios in the nation. The largest plans in these states also use actuarial funding, regularly update experience studies, employ reasonable amortization methods, and assume rates of return that are lower than the national median for determining actuarial contributions. Kentucky, New Jersey, and Illinois continue to report GASB-funded ratios under 40%, reflecting a history of pension underfunding that makes assumed rates of return used in actuarial funding targets less relevant, and that has contributed to budgetary pressure in those states and relative credit differentiation, with all three rated among the lowest of the 50 states.

Chart 4


Table 1

Fiscal 2017 Best-Funded Pension Ratios
South Dakota 100.08
Wisconsin 99.12
New York State 96.69
North Carolina 90.65
Idaho 90.62

Table 2

Fiscal 2017 Worst-Funded Pension Ratios
Kentucky 33.82
New Jersey 35.79
Illinois 38.42
Colorado 42.77
Connecticut 45.72

Measuring Minimum Funding Progress

Many states are funding their pensions on an actuarial basis; however, lagged adjustments to required employer and employee contributions or benefits, weak amortization methods, or prolonged periods between experience studies and corresponding assumption changes can significantly influence whether there is a credible path forward to fund a plan's estimated long-term unfunded liability. If the underlying actuarial assumptions are not conservative enough or if the funding strategy is poorly crafted, even actuarially determined contributions could fail to make realistic funding progress toward paying down the long-term liability.

A state's track record and ability to manage long-term pension liabilities in the context of the current investment environment and demographic trends are important components in S&P Global Ratings' analysis of state credit quality. In our view, states that consistently fully fund required contributions on an actuarial basis and use conservative assumptions and methods are more likely to effectively manage their pension liabilities and the associated long-term budgetary costs than states that do not. In addition, states that continue to take the long view when reforming funding policies and change actuarial assumptions on a timely basis to calibrate more conservatively with actual experience are better positioned to mitigate the risks of future long-term budget pressures.

Chart 5 compares total annual plan contributions to certain costs driving the annual change in the net pension liability. We believe there is likely some minimum amount of funding progress if the annual plan contributions cover service cost (the present value of benefits earned by participants in the year), a portion of the annual total interest cost related to pension liabilities unmatched by plan assets, and 1/30th of the beginning net pension liability (see Survey Methodology). The chart reveals that, on the whole, plan contributions for only nine of the states covered these annual costs for the most recently reported year. Many of the states that show strong progress in meeting these annual measures are also those with consistently highest reported funded ratios.

Chart 5 also highlights that even for states that maintain a track record of funding at actuarially determined levels, total plan contributions can still fall short of levels necessary to make progress on paying down the long-term liability. This typically happens when the actuarial assumptions and methods used to calculate actuarially determined contributions are somewhat optimistic and do not align with recent experience.

Accordingly, states that continue to reflect very weak pension funding progress tend to base pension contributions on fixed statutory rates or underfund on an actuarial basis with optimistic assumptions. Those states that demonstrate weak pension funding discipline, thin pension funded ratios, and structural budgetary imbalances have generally experienced deterioration in credit quality in recent years.

Chart 5


Improved Assumptions Are Key To Stable State Pension Funding But Some Plans Remain At Risk In Another Recession

We believe funded ratios should stabilize for states that demonstrate a commitment to funding pension plans and make ongoing proactive changes to align actuarial assumptions with experience. However, current pension plan investment portfolios largely make certain state pension funds vulnerable to market volatility. Significant investment losses for pension funds could make for a rougher road in the next recession, particularly for those states that have struggled to make up for previous pension weakness.

Chart 6


Table 3

U.S. States' Pension Liabilities And Ratios--Fiscal 2017
State Funded ratio (%) Versus last year NPL (mil. $) NPL pc ($) Debt, pension, and OPEB pc ($) State's largest plan GO or ICR rating/outlook


69.55 Higher 3,473 713 3,724 AL_Emp Ret Sys AA/Stable


66.56 Higher 4,466 6,037 9,927 AK_Pub Emp Ret Sys AA/Stable


67.28 Higher 5,285 753 1,484 AZ_State Ret Sys AA/Stable


76.29 Higher 3,235 1,077 2,351 AR_Pub Emp Ret Sys AA/Stable


68.06 Lower 98,458 2,490 6,962 CA_Pub Emp Ret Fund AA-/Stable


42.77 Lower 17,779 3,171 3,735 CO_State Division AA/Stable


45.72 Higher 34,811 9,702 22,106 CT_State Emp Ret Sys A/Stable


82.84 Higher 1,787 1,858 12,978 DE_State Emp Ret Sys AAA/Stable


83.89 Lower 5,369 256 2,017 FL_Florida Ret Sys AAA/Stable


79.04 Higher 7,366 706 3,311 GA_Emp Ret Sys AAA/Stable


54.80 Higher 7,330 5,135 15,874 HI_Emp Ret Sys AA+/Stable


90.62 Higher 421 245 358 ID_Pub Emp Ret Sys AA+/Stable


38.42 Higher 134,376 10,496 16,171 IL_Teach Ret Sys BBB-/Stable


60.74 Higher 13,321 1,998 2,332 IN_Teach Ret Fund Pre-1996 AAA/Stable


82.13 Higher 1,320 420 738 IA_Pub Emp Ret Sys AAA/Stable


67.12 Higher 8,828 3,031 4,552 KS_Pub Emp Ret Sys AA-/Stable


33.82 Higher 37,637 8,450 11,518 KY_Teach Ret Sys A/Stable


65.42 Higher 6,417 1,370 3,928 LA_State Emp Ret Sys AA-/Stable


80.93 Higher 2,451 1,835 3,848 ME_Pub Emp Ret Sys AA/Stable


69.38 Higher 20,263 3,348 7,475 MD_Teach Ret Pen Sys AAA/Stable


59.49 Higher 37,304 5,438 13,732 MA_Teach Ret Sys AA/Stable


65.14 Lower 15,485 1,554 3,632 MI_Pub Sch Emp Ret Sys AA/Stable


61.04 Higher 9,925 1,780 3,257 MN_State Employment Ret Sys AAA/Stable


61.58 Higher 3,129 1,048 3,088 MS_Pub Emp Ret Sys AA/Stable


58.52 Lower 6,340 1,037 2,009 MO_State Emp Plan AAA/Stable


72.86 Higher 2,034 1,936 2,557 MT_Pub Emp Ret Sys AA/Stable


85.93 Higher 419 218 233 NE_Sch Emp Ret Sys AAA/Stable


74.45 Higher 2,191 731 1,842 NV_Pub Emp Ret Sys AA/Positive

New Hampshire

62.58 Higher 1,005 748 3,334 NH_NH Retirement System AA/Stable

New Jersey

35.79 Higher 102,000 11,326 25,730 NJ_Teach Pen Ann Fund A-/Stable

New Mexico

62.52 Lower 5,987 2,867 6,383 NM_Edu Ret Brd AA/Stable

New York State

96.69 Higher 4,735 239 7,175 NY_Emp Ret Sys AA+/Stable

North Carolina

90.65 Higher 1,927 188 3,919 NC_Pub Emp Ret Sys AAA/Stable

North Dakota

63.78 Lower 865 1,145 1,343 ND_Pub Emp Ret Sys AA+/Stable


76.28 Higher 5,251 450 2,979 OH_Pub Emp Ret Sys AA+/Stable


79.14 Higher 2,320 590 1,139 OK_Teach Ret Sys AA+/Stable


83.12 Higher 2,788 673 2,728 OR_Pub Emp Ret Sys AA/Stable


53.68 Higher 44,029 3,438 7,024 PA_Pub Sch Emp Ret Sys A+/Stable

Rhode Island & Providence Plantations

53.70 Lower 3,321 3,134 5,464 RI_Emp Ret Sys AA/Stable

South Carolina

54.25 Higher 3,925 781 3,795 SC_SC Ret Sys Plan AA+/Stable

South Dakota

100.08 Higher (2) (2) 590 SD_SD Ret Sys AAA/Stable



Lower 1,816 270 791 TN_Cons Ret Sys AAA/Stable


76.06 Higher 44,770 1,582 5,125 TX_Emp Ret Sys AAA/Stable


85.99 Higher 1,621 523 1,354 UT_Non Cont Ret Sys AAA/Stable


61.72 Lower 2,152 3,450 8,277 VT_Teach Ret Sys AA+/Stable


74.85 Higher 6,869 811 2,734 VA_Ret Sys_State AAA/Stable


89.46 Higher 2,576 348 3,628 WA_Pub Emp Ret Sys 1 AA+/Stable

West Virginia

78.93 Higher 3,554 1,957 4,414 WV_Teach Ret Sys AA-/Stable


99.12 Higher 231 40 2,598 WI_Wis Ret Sys AA/Stable


74.21 Higher 491 848 2,139 WY_Pub Emp Pen Plan AA+/Stable
Total 733,451
Average 69.47 4,195 1,111 3,630
*Alabama incorporates fiscal 2016 information for employees' retirement system agent plans as reported in the state's unaudited fiscal 2017 comprehensive annual financial report (CAFR). §Tennessee reflects 2016 plan information for state agent plans as reported in the state fiscal 2017 CAFR. NPL-- Net pension liability. pc--Per capita. OPEB--Other postemployment benefits. GO--General obligation. ICR--Issuer credit rating.

*Change in Median and Average Public Pension Plan Investment Return Assumptions, NASRA Public Fund Survey, June 2018

Zoya Alam contributed research to this report.

This report does not constitute a rating action.

Primary Credit Analyst:Sussan S Corson, New York (1) 212-438-2014;
Secondary Contacts:Todd D Kanaster, ASA, FCA, MAAA, Centennial + 1 (303) 721 4490;
Todd N Tauzer, FSA, CERA, FCA, MAAA, San Francisco (1) 415-371-5033;

No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, (free of charge), and and (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at

Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to:

Register with S&P Global Ratings

Register now to access exclusive content, events, tools, and more.

Go Back