articles Ratings /ratings/en/research/articles/230907-u-s-state-pension-and-opebs-funding-progress-is-likely-to-pick-up-in-2023-after-slipping-in-2022-12833080 content esgSubNav
In This List

U.S. State Pension And OPEBs: Funding Progress Is Likely To Pick Up In 2023 After Slipping In 2022


History Of U.S. State Ratings


U.S. State Ratings And Outlooks: Current List


U.S. States Jump Start Electric Vehicle Charging Infrastructure


Comparative Statistics: Local And Regional Government Risk Indicators: Canadian LRGs' Buoyant Fiscal Performance Will Persist Despite High Inflation And Near-Term Headwinds

U.S. State Pension And OPEBs: Funding Progress Is Likely To Pick Up In 2023 After Slipping In 2022

Although S&P Global Ratings' annual survey shows state pension funded ratios slipped in 2022, improving asset performance for the fiscal year ended June 30, 2023, and a continuing focus on funding discipline will likely support near-term positive funding progress. Still, absent prudent risk management over time, a confluence of factors, structural demographic shifts including an aging population, and medical cost growth, could add budgetary pressure tied to pension and other postemployment benefit (OPEB) funding longer term.

By The Numbers


What We're Watching

Why this matters

In our view, pension and OPEB plans that continue to prioritize long-term savings and risk management over short-term budgetary relief could yield an improving trajectory of pension and OPEB costs. At the same time, focused funding discipline should help many U.S. states manage through long-term challenges--including the ongoing bulge in baby-boomer retirements of state workforces over the next five to 10 years--and, more important, limit budgetary pressure as states ensure stability of payments to beneficiaries.

What we think and why

Following recent swings in pension performance, early reporting of state plan investment returns for 2023 could be reminiscent of median returns achieved over the past decade, and near or above an average pension plan's 7% long-term assumed annual asset return. However, against an uncertain economic backdrop for 2024, the outlook for pension and OPEB funding for states could be affected by higher-for-longer benchmark federal funds rates that could slow economic growth and also boost pensionable salaries and cost-of-living adjustments (COLAs) for pensioners, and a continuing wave of the public workforce at or approaching retirement age in the coming years. As state-level pension and retiree health care plans work to adapt to these shifting economic and demographic paradigms, strong oversight and management will be key to stabilizing or reducing growth in these liabilities.

OPEB funded levels experienced a bump in 2022, thanks in part to an increase in the bond market rates, thereby increasing discount rates and reducing the liability. Although most states currently lack concrete plans to address their OPEB liabilities, we believe many will eventually attempt to address them through a combination of benefit modifications and pre-funding. However, this could prove difficult for some states with constitutional, statutory, or contractual limitations on reducing benefits. Ultimately, our OPEB risk assessment focuses on a state's relative level of the liability compared with that of other states, the legal and practical flexibility that a state possesses to adjust these liabilities, and the overall strategy to manage the cost of these benefits, which will affect future contribution rates and budgetary requirements.

Chart 1


Chart 2


Many States Still Fall Short Of Minimum Funding Progress (MFP) Despite Reforms

Despite efforts to improve funding discipline, many states are falling short of making meaningful progress on their aggregate pension and OPEB liabilities. Many are funding their retirement liabilities on an actuarial basis; however, if the underlying actuarial assumptions prove too aggressive or if contribution methods are weak, actuarially determined contributions (ADCs) could fail to make meaningful funding progress.

OPEB plan funding stands in stark contrast to funding for state pension plans. Most states continue to fund 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 to accrue returns and help offset future costs.

Pension And OPEB Liabilities: Demographics Play An Influential Role

We believe long-term demographic trends could play a significant role in the trajectory of state pension and OPEB liabilities. States with mature plans and elevated discount rates that still have low funded ratios might warrant additional attention to budgetary vulnerability. As the proportion of benefits accrued increases for mature plans, there is less flexibility to reduce costs; this leads to increased liquidity needs, and results in a reduced capacity to withstand market volatility. A mature plan with a high active-to-beneficiary ratio might also elect to reduce market risk by incorporating a safer target portfolio and corresponding lower assumed return, which correlates to a lower discount rate and, therefore, a lower funded ratio and higher but less volatile costs down the road.

States With Weak Pension Funding That Make Up Ground Still Have A Long Way To Go

We highlight five states (Connecticut, Illinois, Kentucky, New Jersey, and Vermont) within our survey that consistently ranked among the lowest pension funded levels. Each was experiencing projected cost escalation that made it difficult for them to absorb the costs into their budgets and contributed to credit pressure. Recently, these states took actions to steer their underfunded pension systems back toward stability. These changes included increasing contribution rates, making benefit changes, directing budget surpluses to correct past contribution underfunding, and de-risking the portfolios through more conservative plan management and assumption changes. As a result, the budget burden from high pension and retiree medical costs has stabilized, and in some cases, shown some signs of abating.

For these states that exhibit comparatively weak funding levels, an improving trend in pension funding levels, and demonstrated funding discipline, in combination with other factors we assess under our "U.S. State Ratings Methodology" criteria, have coincided with improving or stabilizing credit fundamentals over the past year. Although we view each of these state's pension burden as high and a long-term credit consideration, below we highlight recent incremental progress in each:

Chart 3



While Connecticut's large unfunded liability remains exceedingly high and a continuing credit pressure, assumption changes to lower the assumed rate of return to 6.9%, use of a closed layered amortization method, and transition to a level-dollar funding plan could improve plan liquidity in the long term and stabilize future costs, thereby aligning more closely with our evaluation of pension risk. Following fiscal reforms in fiscal 2018, the state began transferring surpluses in excess of its budget reserve and revenue volatility caps to make additional pension contributions from fiscal years 2020-2022, for a combined total of $5.79 billion to its two largest pension plans.At fiscal year-end 2023 (June 30), Connecticut estimates $1.96 billion in transferred funds will be deposited to pay down pension plan liabilities, bringing expected contributions in excess of the state's ADC payments to $7.8 billion, or more than 20% of the total unfunded liability for these systems. If the magnitude and frequency of excess pension contributions are sustained, and we believe the growth trajectory of Connecticut's long-term liabilities is meaningfully reduced, we could view these additional pension contributions as a credit strength.


Illinois's state pension systems have adjusted assumptions and benefits over the past few years and the weighted-average assumed return has dropped to 6.84%. The state is now fully funding the statutory pension contribution amount, and forecasts that pension contribution cost growth will be 2.5% annually in fiscal years 2023-2026, compared with 7.4% in the previous four-year period. In fiscal years 2022 and 2023, Illinois contributed to a pension stabilization fund in addition to the statutorily required amounts for the state-sponsored plans; the recently adopted 2024 budget includes another supplemental payment of $200 million to the pension stabilization fund. With the additional payments from this fund, Illinois will have contributed an additional $700 million to the five state-sponsored plans. The escalating contribution schedule laid out in the Illinois pension code, plus the supplemental contributions, has improved the ADC shortfall. With escalating schedules and supplemental payments, we believe contributions will be close to SF levels in 2023 and 2024. However, they will still remain short of actuarial recommendations. For more information, see "Pension Spotlight: Illinois," published June 26, 2023.


The commonwealth has made notable progress with increased pension contributions, using less aggressive actuarial assumptions and methods, which has led to improved funded levels and could result in lower contribution volatility in future budgets. The proposed 2023-2024 budget fully funds actuarially determined pension contributions plus meaningful additional amounts. We also view the recent Teachers Retirement System (TRS) pension reform positively. Kentucky enacted House Bill 258 in March 2021, which created a hybrid structure for teachers hired after Jan. 1, 2022, that will provide a foundational defined-benefit plan and a supplemental defined-contribution plan. We believe this is a step in the right direction and note that TRS also lowered its assumed rate of return to 7.1% from 7.5% in the recent reform. The payroll growth assumption used in the contribution calculation of 2.75%, down from an aggressive 3.50%, will reduce deferred costs and result in increased contributions to the plan. Still, TRS and the Kentucky Employee Retirement System contributions fall short of not only our MFP, but also SF, which indicates funding deterioration last year, as contributions did not cover service and unfunded interest costs.

New Jersey

Despite a 7.9% investment loss in fiscal 2022, we believe New Jersey's funded ratio will slowly improve due to the state's full actuarial pension contribution in fiscal 2022, budgeted full ADC in fiscal 2023, and full ADC in the fiscal 2024 budget. We calculate combined fiscal 2023 debt service, pension contributions, and pay-as-you-go OPEB payments of $12.2 billion total a large 23.5% of estimated fiscal 2023 operating funds appropriations on a budgetary basis of accounting. In 2023, we removed our one-notch downward rating adjustment for low funded pension systems under our state rating criteria, based on our belief that New Jersey's combined retirement funds will show a sustained Governmental Accounting Standards Board (GASB) funded ratio above 40% for the near future. Still, this high fixed-charge carrying cost leaves the state vulnerable to financial pressures should there be a pronounced revenue downturn, such as occurred when New Jersey issued a large deficit financing bond in fiscal 2021.


Last year's pension reform legislation included several measures to shore up Vermont's retirement accounts and place pension and OPEB costs on a more sustainable trajectory. These measures included raising state contributions above actuarially determined levels and creating a long-term funding mechanism for higher contributions, raising employee contributions, and lowering COLAs, as well as changing employee eligibility, prefunding OPEB, and providing a one-time state contribution of $200 million to the pension funds. With these changes, we believe Vermont's retirement liabilities are less of a source of credit pressure than they were before pension reform but are still sizable relative to those of state peers. State contributions have exceeded the ADC for the past decade and the ongoing payment of the ADC plus additional contributions pursuant to last year's reforms will result in gradual funding improvement over time. However, as noted, the plans rely on a funding structure that, while improved, still results in meaningful cost deferrals that increase outyear risk.

Policy Decisions, Not Markets, Will Likely Make The Greatest Impact

Some states appear to have recovered a portion of their 2022 losses following expected improvement of asset performance in 2023, but we will continue to monitor if states regain an appetite to implement retirement liability reforms and flatten the trajectory of these costs over the long term.

While retirement plans experienced overall resilience during a period of market volatility, we believe states that proactively reduce unfunded pension and OPEB liabilities and adapt better funding policies are more able to meet evolving challenges. Retirement liability reforms gained traction in the economic expansion leading up to the pandemic, but states might be slow to revisit reforms and assumptions to structurally improve pension and OPEB plans in the near term, which could challenge affordability in future budgets. Deferring these policy decisions for longer could make it more difficult for these states to manage retirement liabilities and overall fixed costs (including debt and entitlements) if left unaddressed.

States pension and OPEB liabilities and ratios--Fiscal 2022
Pensions OPEBs
State Proportionate state NPL or NPA (mil. $) Aggregate pension funded ratio (%) State NPL or NPA per capita ($) Proportionate state NOL or NOA (mil. $) Aggregate OPEB funded ratio (%) State NOL or NOA per capita ($)


3,574 63.0 704 1,445 35.9 285


4,135 71.8 5,637 (1,217) 100.0 (1,659)


5,727 71.9 778 980 61.7 133


2,352 84.8 772 1,474 0.0 484


90,626 77.6 2,322 97,124 3.0 2,488


12,346 61.5 2,114 262 38.6 45


39,763 49.5 10,965 21,154 9.8 5,834


1,613 87.4 1,584 7,664 6.4 7,525


7,481 79.1 336 10,541 0.0 474


12,258 72.2 1,123 5,482 45.3 502


7,352 62.8 5,105 7,627 34.3 5,296


940 84.1 485 (136) 100.0 (70)


144,247 42.6 11,465 58,657 0.1 4,662


9,876 69.3 1,445 59 80.4 9


539 91.8 169 268 0.0 84


10,386 69.8 3,536 0 0.0 0


28,973 46.5 6,421 2,573 47.9 570


7,026 69.8 1,531 6,858 0.0 1,494


2,286 85.9 1,650 2,569 11.4 1,854


19,403 75.8 3,147 13,435 2.8 2,179


41,257 64.3 5,909 13,352 13.0 1,912


20,367 62.1 2,030 4,371 55.8 436


3,346 78.9 585 721 0.0 126


3,581 60.2 1,218 110 0.2 38


7,809 56.3 1,264 2,891 6.3 468


2,742 72.8 2,442 171 0.0 152


(533) 105.1 (271) 25 0.0 13


10 75.2 3 910 -0.7 286

New Hampshire

1,091 65.2 782 2,120 0.4 1,520

New Jersey

79,743 45.0 8,610 88,854 0.1 9,594

New Mexico

5,707 69.6 2,700 592 32.3 280

New York

(3,647) 101.4 (185) 67,663 0.0 3,439

North Carolina

3,668 84.2 343 4,910 10.1 459

North Dakota

1,513 60.4 1,941 42 56.3 54


6,588 77.4 560 504 93.8 43


2,560 79.2 637 (128) 100.0 (32)


3,704 84.6 874 (24) 57.1 (6)


45,692 61.4 3,522 18,268 3.9 1,408

Rhode Island

2,967 61.8 2,713 325 52.3 298

South Carolina

4,129 58.3 782 11,526 9.6 2,182

South Dakota

(2) 100.1 (2) 0 0.0 0


(489) 103.7 (69) 1,834 28.8 260


55,071 74.5 1,834 55,951 4.3 1,863


559 95.2 165 (28) 99.2 (8)


3,035 60.2 4,690 1,515 8.7 2,341


5,599 82.3 645 1,647 12.3 190


(3,241) 104.0 (416) 6,473 0.0 831

West Virginia

2,481 87.4 1,398 89 93.6 50


(2,297) 106.0 (390) 384 59.4 65


512 75.6 881 200 0 344
For most plans, data aligns with a state's 2021 fiscal year. For some plans, data aligns with a state's 2021 or 2023 fiscal years depending on data availability. Plans with calendar year-end reporting periods are incorporated within a state's respective fiscal year (for example, reports ended Dec. 31, 2021, are counted within a state's 2022 fiscal year). We exclude various OPEB plans that do not offer medical benefits. The majority of these benefits resulted in relatively small liabilities but these benefits are sizable for some states. Kansas and South Dakota do not report even an implicit liability for retiree health care benefits. We are calculating Iowa’s aggregate pension funded ratio as overfunded despite having a small proportionate state NPL due to how we aggregate pension data across state plans. We are calculating Nevada’s aggregate OPEB funded ratio as negative because the state’s plan reported gross benefit payments that exceeded contributions and income in fiscal 2021. We are calculating a NOA for Utah’s OPEB plans although the state’s aggregate OPEB funded ratio is below 100% due to how we aggregate OPEB data across state plans. New Mexico’s pension data reflects 2021 plan annual comprehensive financial reports for the New Mexico Educational Retirement Board. Average NPL--Net pension liability. NPA--Net pension asset. NOL--Net OPEB liability. NOA--Net OPEB asset. OPEB--Other postemployment benefits. N/A--Not applicable.

Related Research

This report does not constitute a rating action.

Primary Credit Analysts:Thomas J Zemetis, New York + 1 (212) 4381172;
Oscar Padilla, Dallas + 1 (214) 871 1405;
Secondary Contacts:Sussan S Corson, New York + 1 (212) 438 2014;
Geoffrey E Buswick, Boston + 1 (617) 530 8311;
Todd D Kanaster, ASA, FCA, MAAA, Englewood + 1 (303) 721 4490;
Ladunni M Okolo, Dallas + 1 (212) 438 1208;
Research Contributors:Ritesh Bagmar, CRISIL Global Analytical Center, an S&P affiliate, Pune
Romi Pandey, CRISIL Global Analytical Center, an S&P affiliate, Pune

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 acknowledgement 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 nonpublic 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 (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

Register with S&P Global Ratings

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

Go Back