articles Ratings /ratings/en/research/articles/200803-sudden-stop-recession-pressures-u-s-states-funding-for-pension-and-other-retirement-liabilities-11587385 content
Log in to other products

Login to Market Intelligence Platform


Looking for more?

Request a Demo

You're one step closer to unlocking our suite of comprehensive and robust tools.

Fill out the form so we can connect you to the right person.

If your company has a current subscription with S&P Global Market Intelligence, you can register as a new user for access to the platform(s) covered by your license at Market Intelligence platform or S&P Capital IQ.

  • First Name*
  • Last Name*
  • Business Email *
  • Phone *
  • Company Name *
  • City *
  • We generated a verification code for you

  • Enter verification Code here*

* Required

Thank you for your interest in S&P Global Market Intelligence! We noticed you've identified yourself as a student. Through existing partnerships with academic institutions around the globe, it's likely you already have access to our resources. Please contact your professors, library, or administrative staff to receive your student login.

At this time we are unable to offer free trials or product demonstrations directly to students. If you discover that our solutions are not available to you, we encourage you to advocate at your university for a best-in-class learning experience that will help you long after you've completed your degree. We apologize for any inconvenience this may cause.

In This List

Sudden-Stop Recession Pressures U.S. States' Funding For Pension And Other Retirement Liabilities

Beyond The Buzz: Climate Change Diplomacy With Christiana Figueres


Charter School Brief: California


Bulletin: Illinois’ Credit Faces Mounting Pressure As Stimulus Stalls


Credit FAQ: S&P Global Ratings' Approach To U.S. State Credit Enhancement Programs

Sudden-Stop Recession Pressures U.S. States' Funding For Pension And Other Retirement Liabilities

Leading up to the current economic downturn, state governments steadily improved their pension funding discipline while continuing progress toward reducing risk over the past year. S&P Global Ratings continued to observe states adopt more conservative actuarial assumptions and methods or direct resources into pension plans above required contributions. Meanwhile, most states neglected to leverage the expansion for meaningful progress toward improving the fiscal health of their other post-employment benefit (OPEB) plans, choosing to direct limited surplus revenues to other priorities. We view the specter of new fiscal pressures brought on by the COVID-19 induced recession and the abrupt end of one of the longest economic expansions in U.S. history a risk to future pension and OPEB funding improvements.

In our opinion, the onset of the sudden-stop recession increases the potential that states may fall back on their pension funding discipline improvements, or move away from pre-funding OPEB liabilities, in an effort to ease budgetary pressures. However, S&P Global Ratings does not expect extensive pension or OPEB reforms to occur in fiscal 2021 due to more immediate challenges facing state governments and the upending of regular legislative sessions. Widening budget gaps this year are more likely to result in reduced contributions, extending amortizations, and other actions that may slow the pace of pre-funding these liabilities.

Looking forward to next year's results, increasing market volatility and uncertainty surrounding the global economy may result in lower funded ratios. Maintaining contribution sufficiency, particularly during challenging budget cycles, is also a key consideration of future plan funding. Despite the S&P 500's strong recovery at June 30, following a steep decline earlier this year, public pension plan investment returns are likely to close below their expected return assumptions. Overall, progress on future plan funding is unlikely during what we expect to be an unprecedented period of economic uncertainty.

Results Of Annual Survey Of State Pension And OPEB Funding For Fiscal 2019

Overall, states' pension and OPEB funding remained mostly unchanged in fiscal 2019. State action toward addressing retirement liabilities continues to focus more on pension funding, leaving OPEB liabilities significantly underfunded.

Despite little movement in pension funded ratios, states have made progress in improving funding discipline, which should positively affect funded levels in the future if maintained. Conservative changes to actuarial assumptions that may reduce funded ratios show a more realistic assessment of market risk tolerance for individual states, thus better enabling them to make funding progress. States that have proactively reduced pension plan discount rates, increased liquidity, and adopted other conservative assumptions should be in a better position than the last recession to manage contribution volatility. This stands in contrast to state OPEB or retiree health care plans where little progress has been made by states toward benefit reforms or significantly increasing contributions in an attempt to pre-fund these liabilities.

Pension funding survey results show slight dip in funded ratios.

S&P Global Ratings annual state pension survey found most state pension systems reported a slight dip in funded levels in fiscal 2019, mainly due to weaker investment returns as of June 30, 2019 (a median of 5.9% for the states' largest plans). The fiscal 2019 aggregate median reported funded ratio of 70.9% for states was down slightly compared with 72.5% for states in fiscal 2018, and an improvement from 69.5% in fiscal 2017 (see table at end for state-by-state details).

Chart 1


Despite the slight decline in funded ratios, states continued to make progress on improving funding discipline as more conservative assumptions decrease contribution volatility and can improve plan liquidity. Two notable reforms recognized in reporting this year include Colorado's recent legislation that increased budget allocations to its plan and improved the state's aggregate pension funded ratio to 56% from 44% the year before. However, the state's fiscal 2021 budget adjustments included a one-year suspension of its direct annual allocation of $225 million (or 2% of annual expenditures) from the general fund to reduce pension liabilities. Connecticut's reporting also shows a lowered assumed rate of return on its Teachers' Retirement System (8% to 6.9%), now in line with its State Employees' Retirement System. The state also plans to reduce contribution deferrals by moving to a level dollar amortization beginning with the June 30, 2024, valuation.

The discount rates used to measure funded ratios around the country average approximately 7.2%, but we expect pension plans across the sector will continue to reduce their discount rates to reflect changing macroeconomic conditions and risk tolerance, a trend we have observed over the past decade. As part of these changing macroeconomic conditions S&P Global Ratings recently decreased its discount rate guideline to 6.0% from 6.5% (see "Assessing U.S. Public Finance Pension And Other Post Employment Obligations For GO Debt, Local Governments GO Ratings, And State Ratings," updated July 21, 2020, and the corresponding "Credit FAQ: Pension And OPEB Guidance In U.S. Public Finance," July 21, 2020. Built on foundations of inflation, liquidity risk, and market risk, our guideline was updated for two primary reasons: the underlying long-term inflation assumption decreased to 2.4% from 2.6%; and updated market conditions reflect generally lower returns for a given level of risk. While future reductions in plan discount rates are expected to lower corresponding funded ratios and increase cost, overall funding discipline is expected to improve while limiting risk exposure if annual contribution increases keep pace with these changes.

For more information on efforts states have made to improve pension funding discipline prior to the onset of the recession, see "U.S. State Pension Reforms Partly Mitigate the Effects of the Next Recession,"Sept. 26, 2019.

OPEB funding survey results show modest growth in retiree health liabilities

S&P Global Ratings' latest survey found that U.S. states continue to sharply underfund their OPEB plans as reported aggregate unfunded liabilities ticked upward slightly in fiscal 2019. Across the 48 states that report a liability for retiree medical benefits, the aggregate proportionate share of the net OPEB liability (NOL) rose by 0.9% to $529 billion. Among the states with funded ratios below 40%, 29 states were below 10% funded with 13 states having no prefunding at all.

Chart 2


We expect annual OPEB costs to increase absent meaningful efforts to pre-fund or reduce the liabilities. In recent years, few states have pursued and implemented OPEB reforms (see "U.S. States Are Slow To Reform OPEBs As Decline In Liabilities Masks Increased Risk," Dec. 3, 2019). While we expect this lack of action to continue in the near term for most states, we note some severely stressed states could choose to pursue actions that provide immediate budgetary relief as they face mounting fiscal pressures resulting from the COVID-19 pandemic. Because the size of these unfunded liabilities varies greatly among states, progress toward reducing them is more pressing for some than others.

Risks Of Pension And OPEB Affordability For States

S&P Global Ratings considers pension and OPEB affordability a key credit risk for U.S. state credit quality. We factor this into our analysis by considering contribution direction and sufficiency. Specifically, we consider two funding metrics:

  • Static funding: An amount that if contributed every year, would neither reduce nor improve the funded ratio; and
  • Minimum funding progress: An amount that includes an addition to static funding that we consider enough to achieve full funding over a reasonable time.

Chart 3 compares total annual plan contributions to certain costs generating the annual change in the net pension liability (NPL). The chart reveals that, on the whole, plan contributions for 15 states covered our minimum funding progress guideline for the most recently reported year, compared to eight the previous year (an improvement from 16% of states to 30%). Many of the states that consistently show strong progress in meeting this metric are also those with the consistently highest reported funded ratios.

Looking at static funding, 48% of states met the threshold this year, up from 40% the prior year. Even for those 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 methods used to calculate actuarially determined contributions assume growth in payroll over a long amortization.

Chart 3


Most states continue to fund their OPEB liabilities on a pay-as-you-go (paygo) basis in which annual funding is equal to the benefits distributed; assets are not set aside in advance to pay benefits in the future. Our survey found that combined annual plan contributions do not cover static funding for nearly 80% of the states surveyed. By not meeting static funding levels, these states will likely report escalating unfunded OPEB liabilities in future years if reform efforts are not implemented. Of the 9 states that reached static funding levels, five (10.4% of the states surveyed) met our minimum funding progress guideline.

Chart 4 illustrates these results by comparing total annual plan contributions to certain costs causing the annual change in the NOL. These results are in contrast to funding for state pension plans where total annual plan contributions for 40% of state plans met static funding and 16% of plans met minimum funding progress. In our view, the strict legal requirements for funding many pension plans, which do not exist for most OPEB plans, are largely responsible for this funding differential.

Chart 4


In our survey results, we expect some variation from year to year to reflect improved disclosure across the sector. As Governmental Accounting Standards Board (GASB) statements 74 and 75 have been implemented over the past two years by states and other plan sponsors for OPEB reporting, improved disclosure has increased our ability to assess the proportionate share of OPEB liabilities applicable to each state.

Sudden-Stop Recession Presents New Challenges For State Pension And OPEB Funding

Pension plan sponsors and administrators are likely entering into a period of fiscal stress. To alleviate budgetary pressures, adjustments to reduce pension plan costs and contribution increases are likely to be considered (see "Pension Brief: The Future of U.S. Public Pensions after the Sudden-Stop Recession," May 6, 2020). Should market returns remain below past peaks, the effect of poor returns will result in an increase in employer contributions or a movement to riskier assets. Furthermore, states that have been funding their unfunded OPEB liabilities above paygo contributions may choose to divert these additional funds to their pension plans or other priorities--if practicable--given stronger legal requirements to fund pension plans.

Prior to the start of 2020, the Federal Reserve lowered the federal funds rate three times, the first time it had done so since 2008, following a period of increases during 2015-2018. In response to the sudden shutdown of the national economy to mitigate the spread of COVID-19, the Federal Reserve reduced rates to near zero, where they are likely to remain for some time. As interest rates remain low, so do bond yields, making safer investment options less attractive for pension funds needing to meet targeted returns.

Chart 5


Increasing asset allocations into equities presents its own risk. Despite the S&P 500's strong recovery following a steep decline earlier this year, consumer confidence is likely to be tapered for some time as a prolonged economic recovery ensues and consumer behaviors change (see "Economic Research: The U.S. Faces A Longer And Slower Climb From The Bottom," June 25, 2020). Health and safety concerns are likely to remain a drag on recovery until a vaccine or viable treatment option is developed. Such risks will likely result in segments of the economy or regions of the country shuttering for a time, negatively affecting corporate performance and equity pricing.

Interest rate volatility will also affect OPEB liabilities. Generally, state plans have applied a discount rate based on a municipal bond rate due to a general lack of interest-earning assets and GASB methodology. In last year's survey, we noted a drop in liabilities primarily due to an increase in the discount rate rather than improved funding or OPEB reforms. In this new economic environment, lower rates over time are likely to increase the size of OPEB liabilities and related costs for states. Discount rate movement based on a conservative municipal bond rate is considered to be within reasonable volatility expectations and we don't consider it to be a fundamental change in the funded status of the plans. 

Culling Of State Employee Payrolls Will Weaken Plan Demographics And Increase Costs

Similar to the last recession, state governments have started to reduce headcount in an effort to find budgetary relief. State employment rolls (excluding education) peaked in April 2008, before reaching their trough in December 2013, a 6.5% decline. Employment improved over the past six years peaking in April 2020 before starting to decline again. However, state government employment remains well below its 2008 peak.

Chart 6


Declining payrolls will negatively affect contributions, as fewer active employees contribute to plan assets. Contributions are particularly affected by payroll if the amortization is built around a growth assumption. The contribution shortfalls are likely to augment liquidity pressures for some plans, particularly those with low funded ratios and already weak demographics (see "Pension Brief: Liquidity Is a Rising Concern for U.S. Public Pensions in down Markets," March 24, 2020). Reduced plan inflows are compounded by increased outflows for a greater number of retirees and beneficiaries. The result is greater strain on employers, as well as asset returns, to maintain plan funding. Increased liquidity needs, along with reduced capacity for market volatility, could push mature plans (those with lower active to beneficiary ratios) toward lower assumed returns in an effort to increase contributions.

States generally have more options to address rising OPEB costs if they become unaffordable because they typically have a stronger legal ability to modify these benefits. For example, states may repeal benefits for Medicare-eligible retirees to generate cost savings. (For more on retiree health care offerings by state governments, see "Retiree Medical Benefits Generate Unique Cost Drivers And Risks For U.S. States," published Sept. 17, 2019.) However, waiting until costs become unaffordable to take action is not fiscally prudent over the long term, in our view, especially given practical limitations to plan adjustments. Even if there is legal flexibility, there may be other obstacles to reducing benefits and associated costs (see "OPEB Brief: Risks Weigh On Credit Even Where There Is Legal Flexibility," published May 22, 2019).

Pension And OPEB Funding Discipline Faces Uncertainty Post-Recession

In our view, the current sudden-stop recession was spurred by an extraordinary event and will require extraordinary measures in the near term to keep state budgets balanced (see "U.S. States Mid-Year Sector View: States Will Continue To Be Tested In Unprecedented Ways," July 13, 2020). Similar to the years following the last recession, we expect state governments to take action to ease budgetary stress. For pension plans, we expect states will consider extending amortization periods, benefit design changes, early retirement incentive programs, and other structural changes to reduce costs. The most direct form of alleviating pension costs is to pay less than what is required or issue debt to fund recurring contributions, both of which are actions that S&P Global Ratings views negatively when determining if a budget is structurally balanced.

For OPEBs, S&P Global Ratings believes it is crucial for states to prudently manage plan fiscal health ahead of a tipping point where rising retiree medical benefits costs themselves lead to budgetary stress. While we recognize it will likely be difficult to divert scarce resources to unfunded retiree health care liabilities during the current recession, we believe that, on the whole, continued lack of funding OPEB obligations indicates poor plan management, which exposes state governments to rising unfunded liabilities, fixed costs, and budgetary pressure over time. States contributing more than a paygo amount toward these obligations are likely to reduce contributions for budgetary relief. If legally permissible, benefit design changes may also be considered to reduce annual costs.

In the current fiscal year, we consider extensive pension and OPEB reforms unlikely. Any major changes to retirement benefits typically involve a substantial amount of legislative time and stakeholder engagement. Many legislative sessions were upended or shortened by the pandemic and the more immediate issues facing state governments will likely result in reforms being pushed off. Fiscal 2022 budgets are more likely to reflect a need for reform as immediate budgetary pressures abate and states look to address a prolonged economic recovery and softer revenue growth.

States Pension And OPEB Liabilities And Ratios - Fiscal 2019
Proportionate state NPL (mil. $) Aggregate pension funded ratio (%) State NPL per capita ($) Proportionate state NOL (mil. $) Aggregate OPEB funded ratio (%) State NOL per capita ($)


3,233 69.0 659 2,806 23.3 572


4,799 67.4 6,562 31 100.0 43


5,063 71.0 694 816 74.5 112


2,374 80.9 787 2,182 0.0 723


87,094 70.8 2,204 87,179 1.2 2,206


13,182 56.4 2,286 375 24.5 65


40,125 44.4 11,256 19,896 4.3 5,581


1,820 83.4 1,868 7,189 4.9 7,375


7,745 78.2 360 12,190 1.4 567


7,667 78.5 721 5,430 16.9 511


7,899 54.9 5,580 9,410 12.1 6,647


303 94.6 169 21 0.0 12


144,154 38.9 11,381 56,901 0.0 4,492


11,765 63.4 1,746 133 61.0 20


1,132 85.4 359 199 0.0 63


8,677 69.9 2,978 - - -


25,679 44.2 5,747 3,047 38.7 682


6,527 67.4 1,404 8,579 0.0 1,846


2,370 82.9 1,762 2,070 14.1 1,539


20,224 71.6 3,344 15,019 2.3 2,484


41,609 59.3 6,036 12,224 10.1 1,773


19,015 61.1 1,904 8,585 27.9 860


2,659 81.1 471 613 0.0 109


3,205 61.7 1,077 199 0.1 67


7,078 56.4 1,153 3,033 4.4 494


2,426 72.6 2,268 95 0.0 89


459 87.4 237 14 0.0 7


2,264 76.5 733 793 0.1 257

New Hampshire

930 65.5 684 1,998 1.5 1,469

New Jersey

92,516 39.7 10,417 75,962 0.2 8,553

New Mexico

5,735 67.3 2,734 782 18.9 373

New York

3,550 98.0 183 65,058 0.0 3,346

North Carolina

2,420 88.4 230 6,030 4.4 574

North Dakota

594 69.8 779 4 62.1 5


3,721 81.1 318 352 53.2 30


1,929 81.6 487 149 0.0 38


3,646 80.2 864 110 99.5 26


43,866 55.9 3,427 17,836 2.8 1,393

Rhode Island

3,442 54.4 3,249 505 28.2 477

South Carolina

14,345 55.4 2,782 14,774 8.4 2,865

South Dakota

(2) 100.1 (3) - - -


1,100 90.6 161 2,435 8.1 356


66,877 69.0 2,303 73,147 1.4 2,519


1,207 85.2 376 70 80.4 22


2,387 61.4 3,825 2,247 2.2 3,600


7,446 74.7 872 1,832 38.9 214


471 96.3 62 5,080 0.0 666

West Virginia

2,953 83.4 1,649 1,486 36.0 830


985 96.5 169 540 0.0 93


644 69.4 1,113 378 0.0 653
For most plans, data aligns with the state's 2019 fiscal year. For some plans, however, data aligns with the state's 2020 fiscal year. We exclude various OPEB plans that do not offer medical benefits. The majority of these benefits resulted in relatively small liabilities however these benefits are sizeable for some states, like Michigan. Kansas and South Dakota do not report even an implicit liability for retiree health care benefits. Arizona's Public Safety Personnel Retirement System and Corrections Officer Retirement plans are excluded from our calculation of static funding and minimum funding progress because a schedule of changes to the NOL was not publically available; both plans are overfunded. California's Trial Courts plan is excluded from our calculation of static funding and minimum funding progress because the state does not disclose schedules of changes to the NOL for the 58 trial courts reported as a part of the primary government in its comprehensive annual financial report. Pension information for CA reflects data that aligns with fiscal 2018 reporting. For states with plan reporting periods that align with a calendar year-end, we utilized reports ending Dec. 31, 2018. Sources: S&P Global Ratings; state-reported data from pension, OPEB, and state CAFRs.

Related Research

This report does not constitute a rating action.

Primary Credit Analysts:Timothy W Little, New York + 1 (212) 438 7999;
Jillian Legnos, Hartford (1) 617-530-8243;
Todd D Kanaster, ASA, FCA, MAAA, Centennial + 1 (303) 721 4490;
Secondary Contacts:Geoffrey E Buswick, Boston (1) 617-530-8311;
Sussan S Corson, New York (1) 212-438-2014;

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