With the back-to-school season now in full swing, we can think of no better time to examine the health of state and local retirement systems that cover K-12 public school teachers and other non-instructional public school employees.
In some areas, K-12 plans have improved substantially over the last two decades. However, there are also specific challenges facing K-12 plans that will determine whether recent improvements will hold.
Equable Insights
- Funded status gains for K-12 plans: Our data include 71 K-12 plans, which are projected to reach an aggregate funded ratio of 84.9% in 2026. That’s the highest level since 2007, just before the Great Recession.
- Unfunded liabilities have declined sharply post-pandemic: The $470.7 billion total 2026 shortfall is down 38.2% from its peak of $762.1 billion in 2020 in nominal dollars.
- The improvement stems from three main factors: Higher contribution rates, state or local governments paying closer to 100% of the actuarially determined contribution (ADEC), and strong investment returns in recent years.
What’s Behind the Rise in Funded Status for K-12 Plans?
The aggregate funded ratio for all 71 K-12 plans we examined is projected to be 84.9% in 2026, just below the 85.0% projected national average for all plans.
The 2026 estimate is the highest level since the peak in 2007, when the funded ratio for K-12 plans reached 91.5%.
One of the main driving factors behind this improvement is an increase in employer contribution rates, which has worked to pay down pension debt.
Employer contribution rates increased from 7.5% of payroll in 2001 to 21.9% in 2026, with most of that going toward amortization payments to make up for past shortfalls. Of that amount, the rate going toward normal cost is virtually unchanged, while the share going unfunded liability payments nearly quadrupled.
| 2001 | 2026 | |
|---|---|---|
| Normal cost rate | 6.1% | 6.0% |
| Debt payment rate | 1.5% | 15.9% |
| Debt share of total | 19.4% | 72.4% |
Source: Equable Institute
In inflation-adjusted dollars, the employer cost of paying down unfunded liabilities jumped over 1,300% between 2001 and 2025, while employer normal cost increased just 30.7% (a result of larger membership totals).
What Drove Debt Payments Up?
One reason debt payments soared is that for years plans did not receive their full actuarially determined employer contribution, and interest accrued on the resulting shortfall.
In 2001, employers paid just over 100% of their actuarially determined employer contributions. That level wasn’t reached again until 2023.
The graphic above shows that employers, in aggregate, almost never paid the full ADEC during the past two decades plus. There were even several years after the financial crisis during which employers paid less than 80% of the ADEC.
Some employers would pay the full actuarial bill while others skipped or shorted payments, but in aggregate employers only paid 90.3% of the ADEC from 2001 to 2025, resulting in a cumulative shortfall of $127.6 billion over that period.
Investment Returns Come with Valuation Risk
Since 2020, investment returns have been working overtime to support the funded status recovery. The 9.5% average return projected for 2026 beat the 6.9% target for the fourth consecutive year. The 10-year rolling average is now 8.9%.
However, those returns come along with greater risk. Since 2001, K-12 plans have allocated more of their investments to valuation-priced assets, like private capital, and less toward market-priced assets, like fixed income.
In 2001, for example, fixed income securities were 32.4% of K-12 plan assets, while private capital and hedge funds were just 3.4% and 0.1%, respectively.
Fast-forward to 2025. Fixed income fell to just 22.5% of plan assets, and the share in equities dropped to 44.1% from 58.8%. Meanwhile, private capital and hedge funds soared to 14.2% and 5.4% of assets. Including real estate and other alternative assets, alternatives now comprise 29.0% of all K-12 plan assets.
This is a risk because if asset values are overstated today, then reported funding levels are overstated. This can lead to lower-than-appropriate contribution rates, which will mean larger unfunded liabilities in the future than if assets were more accurately priced.
What to Watch Going Forward
Funded status for K-12 plans has improved significantly in recent years, particularly since the financial crisis. Still, we will pay close attention to several key factors to understand whether the rebound is sustainable.
- Will employer unfunded liability payments fall as funded status continues to climb, or is the 15%+ rate the new normal?
- Will employers continue to pay near the full actuarially determined contribution rate? If not, recent funded status gains may evaporate.
- Will K-12 plan asset allocations continue to pay off, or will they bite during the next market downturn?
Download the Data
Equable Institute makes all of the data used in this article available to view and download. Navigate to our Public Retirement Research Database page and scroll down to the State of Pensions 2026 Datasets section. There, you’ll find datasets covering the 253 plans included in our State of Pensions 2026 report, as well as the 71 K-12 plans highlighted in this article.
See Where Your Retirement System Stands
Curious how your retirement system stacks up? Use Equable’s Financial Resilience Report to see seven key metrics of your pension fund’s fiscal health, including funded ratio, pension debt, share of required contributions paid, and much more.
