What’s the latest news about state and local pensions? Earlier this month, the Equable Institute, a bipartisan nonprofit that works with public retirement system stakeholders to solve complex pension funding challenges with data-driven solutions, published a fact-filled report The State of Pensions 2023, a Year End Update. This added to its prior major report with a number of important findings.

Here are a handful:

• The average national funded ratio has improved from 74.9% in 2022 to 78.1% at the end of 2023.

• The total pension funding shortfall will decline to $1.44 trillion in 2023, down from the historically high $1.6 trillion in 2022 unfunded liabilities.

• The preliminary 7.47% average investment return for the 2023 fiscal year beat the 6.9% average assumed rate of return for 2023.

• The states with the highest funded ratios (over 90 percent) were Nebraska, New York, South Dakota, Tennessee, Utah, West Virginia, Washington, Wisconsin, and Wyoming. 

• The states with the lowest funded rates (under 60 percent) were Connecticut, Illinois, Kentucky, New Jersey, and South Carolina.

Amidst all this good news, however, lies a somewhat alarming trend that was spelled out in Equable’s prior mid-year report: “States are trying to make up for negative pension funding trends like lower projected returns on stocks and bonds. They are utilizing more and more alternative investments to chase higher returns. This includes investments, hedge funds and private equity strategies, as well as real estate.

“Since 2001, pension funds invested a higher percentage of their assets into these alternative investment categories. Hedge funds, real estate, and private equities are known for a lack of transparency. They also tend to be more volatile in times of economic uncertainty.”Lesson: there are few silver linings without a cloud inside.

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