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Public Pensions Face Sharpest Funded Ratio Drop Since Great Recession

Preliminary 2022 investment losses are estimated at 10.4% on average for state and local plans.

By Michael Katz



State and municipal retirement systems are on pace to lose nearly half of 2021’s bumper crop of investment gains, and the funded ratio of US public pensions is set for it’s biggest one-year decline since the Great Recession, according to a report from non-profit organization Equable Institute.

“The optimism coming out of 2021’s once-in-a-generation bull run was premature,” said the report, “as 2022 brought significant economic and geopolitical challenges that significantly diminished last year’s gains.”

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The State of Pensions 2022 report said that record investment gains and economic growth last year helped push unfunded liabilities below $1 trillion and boost the funded ratio for state and local plans to 84.8%. However, based on preliminary 2022 investment losses of 10.4% on average for state and local plans, it said that all plans will miss their 6.9% assumed return and that the “net result is the largest single-year decline in assets since 2009” as the funded ratio for those plans have fallen to an estimated 77.9% as of June 30.

However, the report said that despite a bear market, geopolitical conflict, and high inflation in the first half of the year that public pension funds still have a net positive funding trend over the last three years. Even with the steep losses this year, the report said the funded status at the end of 2022 will still be better than it was at the end of 2019.

Equable executive director Anthony Randazzo said the public pension funded ratios would be a lot worse this year if not for a trend over the past decade of states lowering investment assumptions, increasing contribution rates, and adopting risk-mitigation tools.

“In an era of substantial financial market volatility, state and local pension funds need policies that allow for automatic contribution rate and benefit adjustments to stabilize retirement systems when there are negative shocks like we’ve seen this year,” Randazzo said in a statement. “Public pension funds are not going to simply invest their way back to fiscal health and resilience.”

The findings of the report, which analyzed 228 of the largest statewide and municipal retirement systems in 50s states, include:

  • Asset allocations continue to shift toward alternative investments. The share of assets allocated to hedge fund managers and private equity strategies has grown to 14.9% from 8% in 2008.
  • States have lowered their investment assumptions significantly with the average assumed rate of return now at 6.9% and below the 7% mark for the first time in modern history.
  • In 2021, 99.8% of required contributions were made by state and municipal governments, the highest level since 2001.
  • Since 2019, only 10 states have seen a drop in funded ratio: Minnesota, Oregon, Idaho, Nebraska, Montana, North Carolina, Vermont, Arkansas, New Hampshire, and Nevada.
  • Public retirees may be more exposed to inflation that many assume, given the limited cost-of-living adjustment provisions that are available across the country. For plans that do offer inflation protection, the average COLA is 1.58% in 2022, which is significantly less than the estimated 8.6% rate of inflation as of May. 

Related Stories:

US Public Pensions’ Funded Ratio Soars to Record in Q4

State Pensions Are in the Black, But Red May Be Ahead

Unfunded Liabilities: How Three Public Pensions Found Themselves in Crisis

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Home > News > Risk > Two Bad Quarters Do Not a Recession Make?
Risk

Two Bad Quarters Do Not a Recession Make?

Economic savants spell out why not to get excited by the back-to-back negative numbers.

By Larry Light

Yikes. Now we have two quarters in a row of shrinkage in the gross domestic product. That has long spelled a recession.

 

But economists and investment strategists were quick to point out Thursday, as the GDP news broke, the two-quarters standard is a very rough rule of thumb and is insufficient to signal a downturn. GDP fell at a 0.9% annual rate in the June-ending quarter, following the March-ending quarter’s 1.6% slide.

 

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Indeed, the National Bureau of Economic Research’s business cycle dating committee is the decider of when a recession is here. In addition to GDP, which may fluctuate due to exogenous factors, the NBER panel weighs a welter of other metrics, such as employment trends and consumer outlays.

 

Reasons to doubt that the GDP decreases in the first and second quarters mean a recession is upon us now:

 

One-time statistical quirks. In an investor note, Cliff Hodge, CIO for Cornerstone Wealth, blamed the first quarter’s drop to an import surge that ballooned the trade deficit, which offset domestic economic growth. In the second period, he went on, “a slowdown in inventory accumulation tipped GDP growth into the red.” As a result, he said, “it’s really difficult to call what we’re experiencing right now a recession.”

 

Jobs. Bill Adams, chief economist for Comerica Bank, wrote that “with solid job growth in the first half of the year, the economy didn’t look like it was in a recession.” Total nonfarm payroll employment increased by 372,000 in June, and the jobless rate remained at 3.6%.

 

Consumers. They are still opening their wallets to buy stuff. “We are not in recession,” said by Jeffrey Roach, chief economist for LPL Financial. “Consumer spending was too strong to raise any recession signals.” Consumer expenditures have risen continuously this year, with the last monthly rise slower than earlier in 2022 but still positive (0.2% in May, versus 0.6% in April).

All that said, no one denies that high inflation, the Ukraine war and all of the rest of humanity’s afflictions lately won’t take a toll up ahead. As Comerica’s Adams put the matter, “While it seems inaccurate to think of the first half of the year as a recession, the outlook for the second half and into 2023 is dicier.”

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