As Pension Funding Levels Fell in 2022, Higher Contributions Helped States Manage Debt

Updates to Pew’s fiscal sustainability matrix, a tool for comparative analysis

Article By: Keith Sliwa, David Draine & Elijah Gullett
Projects: Public Sector Retirement Systems
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As Pension Funding Levels Fell in 2022, Higher Contributions Helped States Manage Debt
The Pew Charitable Trusts

From fiscal year 2021 to 2022, the reported funding gap for state pension plans—the disparity between promised benefits and available assets—jumped by $439 billion to $1.27 trillion. The increase, largely fueled by investment losses, highlights how volatile financial markets continue to expose state and local governments to risk. 

Yet, despite poor investment returns, in 2022, 49 states still contributed enough to their pension plans to meet a key target, the net amortization benchmark, which measures whether employers’ payments are sufficient to prevent pension plan debt—the share of benefit obligations that cannot be paid for with existing assets—from growing. These contributions helped states collectively pay down $61 billion in pension debt. 

To help state policymakers and stakeholders understand the fiscal sustainability of their states’ pension policies, each year The Pew Charitable Trusts reviews the most recent comprehensively available state pension data and updates its Fiscal Matrix of key actuarial, financial, and budgetary risk metrics. For fiscal 2022, the data shows significant improvement in plans’ cash flow and in the adequacy of employers’ contributions to pension funds. However, challenges in managing contribution volatility and long-term risk persist.

Reduced funded ratio

The overall funded ratio—the share of pension liabilities matched by plan assets—dropped to 74% in 2022 from 82% in 2021. The typical plans’ investments lost 7.77% in the fiscal year ending June 30, 2022, according to data from Wilshire TUCS, resulting in a $191 billion loss as reported in state pension plans’ 2022 disclosures. And because the typical pension plan expects to generate average returns of around 7% annually, the gap between expectations and actual performance was in the double digits for most state plans.

Although the overall funded ratio fell in 2022, it was still above the 69% level recorded in 2020. Overall, 39 states’ funding ratios rose from 2020 to 2022, after accounting for both the windfall investment returns of 2021 and the subsequent correction. Fifteen states had ratios of at least 80%, and four—New York, South Dakota, Tennessee, and Washington—were at or above 100%. 

49 states met or exceeded required contributions in 2022

Although investment returns drive short-term ups and downs in pension funding, long-term sustainability comes from consistently making adequate contributions to stabilize plan funding and pay down pension debt.

The net amortization benchmark, calculated as the sum of the cost of new benefits and interest on existing pension debt less employee contributions, provides a metric for evaluating how states are faring in that effort. States that meet or exceed this measure can expect to see their funding gaps stabilize or shrink over the long run. In 2022, overall employer contributions plus interest to state pension plans totaled $155 billion, a $23 billion increase from the previous year, and all but New Mexico met the benchmark, up from 39 in 2021 and just 17 in 2014. 

This performance was aided by the strong investment returns in 2021, which lowered the net amortization benchmark. Windfall investment yields cut the aggregate funding gap by $548 billion at the start of 2022, which in turn lowered interest on reported pension debt by about $37 billion. As a result, the amortization benchmark fell from $133 billion in 2021 to $94 billion a year later.

However, because the benchmark is subject to investment volatility, assessing contribution adequacy over time can help clarify the picture of plan sustainability. From 2018 through 2022, 36 states had positive amortization, meaning they made contributions that were large enough to pay down pension debt. Another four had stable amortization, with payments that were adequate to prevent debt from growing. And 10 states’ contributions were insufficient to cover benefits and interest over the four-year period, resulting in negative amortization and growing pension debt.

States are paying down pension debt ahead of schedule

The $24 billion increase in employer pension contributions plus interest from 2021 to 2022 included states where policymakers chose to make supplemental payments—contributions above and beyond the required actuarial rates. Like any debt, paying down pension liabilities saves money over the long term.

States can use windfall revenue and budget surpluses to make additional payments toward pension debt, improving their balance sheets and building a cushion against future downturns. Arizona, Connecticut, Colorado, Kansas, and Oregon all made supplemental 2022 pension payments out of state and local budgets and by issuing pension obligation bonds.

Fiscal sustainability matrix 2022

To help policymakers navigate the inherent uncertainty of pension management and assess the resiliency of their plans, Pew created a 50-state matrix of fiscal sustainability. This tool collects critical information into a single table to highlight the practices of successful states and facilitate comparative analyses, using three sets of metrics: 

  • Historical actuarial metrics are the foundation of any fiscal assessment and show how past policies contributed to plans’ current financial position. But they provide little information with which to assess future investment or contribution risks. 
  • Current financial metrics, based on historical cash flows and funding patterns, provide the information necessary to assess whether a plan is adhering to funding policies that target debt reduction or is at risk of fiscal distress, such as underfunding or insolvency. 
  • Budgetary risk metrics provide essential information to help policymakers plan for uncertainty or for volatile costs and to prompt reforms when needed to ensure that pension plan costs and risks, which are largely borne by state and local budgets, do not crowd out other important public investments.

Fiscal Stability Dashboard

Actuarial Metrics Plan Financial Metrics Budget Risk Indicators
State Funded Ratio, 2022 Change in Funded Ratio, 2008-2022 Employer Cost/
Payroll		 Operating Cash Flow Ratio, 2022 Change in OCF Operating Cash Flow Ratio, 2014 Net Amortization, 2022 Historic Contribution Volatility Assumed Rate of Return Normal Cost Sensitivity
Alabama 61.4% -15.6% 13.5% -3.6% 0.5% -4.1% Positive 6.7% 7.4% High
Alaska 71.8% -3.9% 59.1% -3.7% -1.0% -2.7% Positive 45.0% 7.4% Low
Arizona 71.8% -8.2% 38.7% 6.1% 8.7% -2.6% Positive 31.0% 6.9% Mid
Arkansas 78.8% -8.4% 15.7% -3.1% -0.3% -2.8% Positive 1.7% 7.3% High
California 76.3% -10.4% 30.9% -0.7% 2.0% -2.7% Positive 23.2% 7.0% High
Colorado 64.1% -5.7% 26.3% -2.2% 2.3% -4.5% Positive 16.0% 3.0% Mid
Connecticut 49.9% -11.7% 51.5% 0.7% 3.4% -2.7% Positive 34.7% 6.9% Mid
Delaware 87.2% -11.1% 14.9% -2.4% 0.5% -2.9% Positive 7.5% 7.0% High
Florida 79.1% -22.3% 6.5% -3.7% 0.7% -4.4% Positive 3.8% 3.9% High
Georgia 72.4% -19.2% 21.1% -2.6% 1.3% -3.9% Positive 12.4% 6.9% Mid
Hawaii 62.8% -6.0% 34.2% -1.1% 1.1% -2.2% Positive 21.3% 7.0% High
Idaho 84.1% -9.1% 12.1% -1.6% 0.2% -1.8% Positive 1.3% 6.4% Mid
Illinois 42.5% -11.8% 54.3% -1.1% 0.4% -1.5% Negative 44.6% 6.8% High
Indiana 72.7% 0.3% 23.1% 0.1% -0.2% 0.3% Positive 11.5% 6.3% Mid
Iowa 91.0% 2.3% 9.7% -2.6% 0.3% -2.9% Positive 3.8% 7.0% Mid
Kansas 69.8% 10.9% 27.1% 1.9% 4.7% -2.8% Positive 21.4% 7.3% Low
Kentucky 46.5% -17.3% 56.3% 0.1% 7.1% -7.0% Positive 45.9% 6.2% Low
Louisiana 69.9% 0.3% 33.2% -2.7% 0.6% -3.3% Positive 16.1% 7.4% High
Maine 87.3% 7.7% 20.9% -1.7% 1.2% -2.9% Positive 8.5% 6.5% Mid
Maryland 75.7% -2.6% 17.6% -2.0% -0.2% -1.8% Positive 9.5% 6.6% Mid
Massachusetts 63.6% 0.6% 27.4% -0.9% 2.4% -3.3% Positive 18.6% 7.0% High
Michigan 62.1% -21.6% 34.0% -2.6% 3.2% -5.8% Positive 25.5% 6.8% Low
Minnesota 77.7% -3.7% 9.3% -3.1% 1.0% -4.1% Positive 3.0% 7.1% High
Mississippi 60.1% -12.8% 19.0% -4.1% -0.8% -3.3% Stable 7.8% 7.6% High
Missouri 78.9% -4.0% 16.4% -3.1% -0.2% -2.9% Positive 4.5% 7.0% High
Montana 73.3% -10.1% 15.2% -3.2% -1.5% -1.7% Positive 6.5% 7.3% High
Nebraska 94.1% 2.6% 10.3% -1.8% -0.8% -1.0% Positive 2.4% 7.3% Mid
Nevada 75.1% -1.0% 15.5% -1.8% -0.8% -1.0% Positive 12.0% 7.3% Mid
New Hampshire 65.2% -9.9% 19.0% -1.1% 0.5% -1.6% Positive 10.9% 6.7% High
New Jersey 45.0% -27.6% 34.2% -0.9% 6.0% -6.9% Positive 28.7% 7.0% High
New Mexico 67.1% -15.7% 16.5% -3.4% -0.4% -3.0% Negative 4.6% 7.1% Mid
New York 102.9% -4.5% 17.1% -3.4% -1.0% -2.4% Positive 12.6% 5.9% Mid
North Carolina 84.2% -15.1% 15.1% -1.6% 1.4% -3.0% Positive 11.7% 6.5% Mid
North Dakota 60.4% -26.6% 10.4% -1.7% -0.8% -0.9% Positive 5.2% 7.2% Mid
Ohio 77.3% 0.0% 13.9% -3.8% 1.1% -4.9% Positive 4.2% 7.0% High
Oklahoma 77.8% 17.1% 20.7% -2.1% -0.3% -1.8% Positive 4.5% 7.2% Mid
Oregon 84.5% 4.3% 31.1% -1.6% 3.4% -5.0% Positive 25.7% 6.9% Mid
Pennsylvania 61.4% -25.6% 33.3% -2.3% 3.7% -6.0% Positive 34.3% 7.0% Low
Rhode Island 61.8% 0.5% 30.0% -2.5% 4.0% -6.5% Positive 11.5% 7.0% Low
South Carolina 58.3% -11.9% 20.3% -1.2% 2.7% -3.9% Positive 10.9% 7.0% High
South Dakota 100.1% 2.7% 6.2% -2.8% -0.2% -2.6% Positive 0.8% 6.5% Low
Tennessee 100.8% 5.7% 12.7% -2.1% 0.1% -2.2% Positive 2.7% 7.2% Low
Texas 74.4% -16.3% 9.7% -2.5% 1.1% -3.6% Positive 4.1% 6.9% Mid
Utah 94.0% 7.4% 23.2% -1.4% -0.2% -1.2% Positive 8.9% 6.9% Low
Vermont 61.9% -25.9% 34.8% 3.4% 4.8% -1.4% Positive 29.4% 7.0% High
Virginia 85.0% 1.4% 17.6% -1.4% 0.9% -2.3% Positive 12.5% 6.8% Mid
Washington 103.9% 3.6% 6.1% -1.0% 1.0% -2.0% Positive 6.4% 7.4% High
West Virginia 87.4% 23.8% 20.6% -3.0% -1.2% -1.8% Positive 42.9% 7.3% High
Wisconsin 95.7% -4.0% 7.2% -3.4% -0.5% -2.9% Positive 2.7% 6.8% Low
Wyoming 75.5% -3.8% 15.2% -2.8% -0.3% -2.5% Positive 9.7% 6.6% High

Notes: Pew's measure of contribution adequacy tests whether employer and employee contributions are sufficient to keep pension debt Stable or to make progress in paying down unfunded liabilities through Positive amortization. States falling short of that minimum threshold have Negative amortization. Historic contribution volatility measures that gap between the highest employer contribution rate and the lowest over the period from 2008 through 2022. Higher values indicate employer costs have been less stable over that period. Normal cost sensitivity offers a measure of how uncertain the cost of benefits earned by newly hired workers is expected to be, based on the level of benefit, the assumed rate of return, and the presence or absence of tools to manage and mitigate risk in the plan design. This is a relative measure based on practices across the 50 states.

Sources: Annual comprehensive financial reports, actuarial reports and valuations, or other public documents, or as provided by plan officials.

Keith Sliwa is a principal associate, David Draine is a principal officer, and Elijah Gullett is an associate with The Pew Charitable Trusts’ state fiscal policy project.