Public Pension Funds Remain in ‘Fragile State,’ per Equable Report

Despite registering an average annual investment gain of 10.3% and raising funded ratios by nearly five percentage points in 2024, public pensions remain in a “fragile state,” according to the Equable Institute’s State of Pensions year-end report.

In 2024, state and local pension funds easily outperformed their average assumed rate of return of 6.87% and raised their funded level to 80.2% from 75.5%. However, according to the report, those figures belie the facts that the robust returns still underperformed many public equity indexes and that funded levels are still too low. Despite the gain, 2024 was the 17th straight year public pension funds’ average funded ratio remained below 90%, which Equable considers the minimum threshold for pensions to be deemed resilient.

“The good news for state legislatures and local government employers is that three straight years of improved funded status for public plans prevented additional unfunded liabilities from piling up,” the report stated. “The bad news is that there is still more than a trillion in pension debt that can’t be paid down using today’s level of contributions.”

The report added that “the need for contribution rate increases remains as urgent as ever, irrespective of the budgetary pressures this creates.”

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A 2024 issue brief from the National Association of State Retirement Administrators found contributions made by state and local governments to pension trust funds in recent years accounted for 5.1% of all non-federal spending. Between 1994 and 2023, pension fund revenue was derived 28% from employer contributions, 11% from employee contributions and 61% from investment earnings, NASRA reported.

Investment returns for the plans in 2024 varied widely, ranging from 5.1% to 21.2%, while pension funds that ended their fiscal year on September 30, 2024, had the best average returns, at 18.9%. The Equable report also stated that approximately 91% of plans beat their assumed returns for fiscal year 2024.

The strong financial market returns in 2024 were not enough to quell concerns about whether governments are willing to move away from high risk/reward investment strategies toward more “realistic long-term investment assumptions,” the report stated. Despite average assumed rates of return remaining relatively unchanged over the past four years, the current 6.87% average rate is “higher than what should be considered reasonable today,” which Equable identified as between 5.5% and 6.5%.

“The trend of adopting more realistic assumed returns over the decade before the Covid Pandemic has stalled,” the report stated.

Additionally, public pension funds’ valuation risk is at a “all-time high,” according to the report, which found 27.7% of pension assets are allocated to private equity, real estate and other alternative investments that rely on non-public valuation methods to record performance data.

The report also held that if tax revenues are stagnant this year, state legislatures “are unlikely to seriously improve how they finance pension debt,” which they could do by making “realistic assumptions and payment plans that don’t budgetarily burden local employers like school districts.”

STATES RANKED BY 2024 FUNDED RATIO
Rank		State	Funded Ratio	Unfunded Liability	Rank		State	Funded Ratio	Unfunded Liability
1	District of Columbia		112.5 %	-$1,403,077,888	42	South Carolina		69.0 %	$21,754,329,088
2	Nebraska		108.5 %	-$1,619,958,016	43	North Dakota		68.9 %	$3,408,814,592
3	Tennessee		107.9 %	-$5,273,603,584	44	New Mexico		67.8 %	$16,547,076,096
4	Utah		104.2 %	-$2,085,706,112	45	Vermont		66.5 %	$3,264,627,200
5	Washington		102.5 %	-$3,891,787,776	46	Connecticut		63.5 %	$33,233,213,440
6	Wisconsin		102.1 %	-$3,008,134,144	47	Hawaii		63.2 %	$13,875,644,416
7	West Virginia		100.4 %	-$81,263,616	48	Mississippi		57.0 %	$25,755,031,552
8	South Dakota		100.0 %	$0	49	New Jersey		56.6 %	$91,114,946,560
9	Minnesota		93.2 %	$7,086,123,008	50	Kentucky		54.1 %	$38,533,578,752
10	New York		92.8 %	$50,920,734,720	51	Illinois		51.6 %	$211,680,788,480
*Funded ratios are the aggregate of all statewide retirement systems and large municipally managed plans. Data is based on actual reported financial and Equable estimates based on benchmark returns for reported asset allocations. Source: Equable Institute

Funded Status of Largest 100 US Public Pension Funds Rises to 78.6%

Public Pension Funded Status Reached 79.4% in May

Tags: Equable Institute, funded level, Funded Ratio, public pension funds, public pensions

Smaller, equity-heavy funds outpaced larger endowments with higher private market allocations during a boom year for artificial intelligence and tech stocks, per NEPC.

In fiscal 2024, university endowments followed a similar trend as the prior year: Endowments with a higher allocation to equites were top performers, while endowments with higher allocations to private markets often saw single-digit returns.

Large-cap tech stocks drove returns in fiscal 2024, due to the artificial intelligence boom and overall strength of the “Magnificent Seven.” At the same time, returns for private equity and venture capital, both hallmarks of large elite endowments, were sluggish.

Among “mega-endowments” with more than $1 billion in assets, the UC San Diego Foundation ($1.6 billion assets under management) took the top spot with a 15.5% return, according to a review of endowment performance in fiscal year 2024 by investment consultant NEPC. This is the second year in a row the equity-heavy UCSD Foundation—which administers the funds of the University of California, San Diego—was the top performer.

The median endowment, out of 78 endowments NEPC tracked, returned 11.9% in the fiscal year.

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“The [UC San Diego Foundation’s] success stems from a unique approach to endowment management that is a particularly good fit for current market trends,” Colin Hatton, an NEPC principal for endowments and foundations, wrote in the NEPC report. “They utilize several University of California General Endowment Pool accounts, enhancing them with their own strategic position which consists primarily of U.S. large-cap equity. It’s a hybrid approach that allows them to benefit from the University of California Investment Office’s resources while employing an asset allocation that meets their own needs.”

The UCSD Foundation allocates approximately 64.8% of its total endowment pool to public equities, as of June 30, 2024, according to the fund’s investment reports. NEPC noted that UCSD’s equity-heavy portfolio drove 90% of the fund’s gains.

Top Performers

Source: NEPC

Many of the top-performing funds on NEPC’s list also had large equity allocations. The endowment of Michigan State University ($4.4 billion AUM) came in second with a 15.1% return; it also has significant alts investments. That fund allocated 39% of its portfolio to equities, 31% to private equity and 22% to hedge funds.

At No. 3, the University of Wisconsin Foundation ($4.3 billion AUM) boasted a 14.7% return, with nearly half of its portfolio in equities.

According to NEPC, large-cap U.S. equities returned 24.6% in fiscal year 2024, the trailing 12-month period which typically ends June 30 for most endowments. During the period, global equities returned 19.4%, while emerging markets and non-U.S. developed equities returned 12.5% and 11.5%, respectively.

Credit returned 10.4% in the fiscal year, while small-cap U.S. equities returned 10.1%. Hedge funds and private equity returned 5.0% and 4.3%, respectively. U.S. core bonds returned 2.6%, and venture capital returned negative 1.1%. The worst-performing asset class during the fiscal year was real estate, with a negative 10% return.

Lowest Returns

The endowments with the lowest returns for fiscal 2024, as tracked by NEPC, include the endowments of Princeton University ($34.1 billion) with a 3.9% return, Yale University ($41.4 billion AUM) with a 5.7% return and Carnegie Mellon University ($3.2 billion) with a 6.6% return.

While it was not a strong year for private assets in endowment portfolios, elite universities which abide by the “Yale Model,” which sees high allocations to private assets, as pioneered by the late Dave Swensen, boast strong long-term returns. These private assets have generally outperformed equities over longer periods of time, and these funds typically have access to the best managers, too.

“We also believe that private equity and venture capital aren’t likely to remain underperforming sectors for an extended period of time,” the NEPC report noted. “Both segments needed to endure a period of repricing in an environment of higher interest rates, but we think that cycle will come to an end now that interest rates are expected to remain stable or come down.”

Many endowments are still reeling from poor returns in fiscal 2022, which followed a strong fiscal 2021. According to the National Association of College and University Business Officers, endowments returned negative 8.0% in 2022, while they gained an exceptional 30.6% in 2021. Many endowments saw their assets peak that year.

Research and analytics firm Markov Processes International noted last December that, for the first time, its “Ivy League” grouping of endowments, which includes non-Ivy schools Stanford and the Massachusetts Institute of Technology, underperformed both a 70/30 portfolio and the average endowment for the second year in a row. Still, over the past 20 years, annualized, these endowments returned an average 9.2%, while a 70/30 portfolio returned 6.8%.