State and local pension plans have reached historic levels of investments in private equity and real estate — doubling down on what has become a high-risk, high reward dilemma for trustees.
This paid off in 2021 but caused a lot of pain in 2022. In an era of volatile financial markets, pension funding is all about risk exposure and risk–mitigation.
Notably, private equity investments are now more than 10% of portfolios — or, at least, they were at the end of 2021 before valuations crashed over the last six months.
Average investment returns were consistently below assumed rates of return over most the past decade. This contributed to the growth in unfunded liabilities for public plans.
We estimate 2022 returns will average -10.4% (for plans through June), which would be the first time since 2009 that state and local plans will post a negative average. Combining 2021 and 2022, the average ten-year return is 7.5%, which is fortunately still above the average assumed return (6.9%).
Fortunately, since 2019 the 10-year average return has remained above assumed returns, and this has helped stabilize funded levels.
The aggregate funded ratio for statewide and municipal plans collectively has lost about half of its gains since 2021. This is the largest single year decline in funded ratio since the Great Recession.
The change in funded ratio over the past three years is also the sharpest period of volatility since the financial crisis.
The pension asset shortfall for statewide plans declined in 2021 to the lowest amount since the financial crisis but then grew in 2022 to again eclipse $1 trillion in total unfunded liabilities.
Total unfunded liabilities for state and municipal plans exploded from $248.8 billion in 2007 to $1.35 trillion at the end of 2009. The funding shortfall increased to a peak of $1.70 trillion in 2020 before dropping back to $933.0 billion in 2021.
We estimate that unfunded liabilities will increase again up to $1.40 trillion in 2022 due to market underperformance.
State and local employee contributions to their own retirement plans have been steadily increasing.
Public sector workers who are also enrolled in Social Security paid 160 basis points more(a 36.5% increase) during the 2022 fiscal year than they did during the 2001 fiscal year and 23.7% more than they did in 2008 before the financial crisis.
Those who do not participate in Social Security paid 14.3% more this year than in 2001 and 10.1% more than 2008.
Government employer contributions have steadily increased over the past two decades, mostly because of increased unfunded liability amortization payments.
Combined state and local employer contributions in 2001 were 9.02% of payroll. During the fiscal year ending 2022, employer contributions are 30.43% of payroll.
Negative net cash flows from contributions and benefit payments have steadily increased over the past two decades, reflecting more “mature” pension plans.
There are 64 plans with assumed rates of return above the current 6.9% median, including 21 plans with a 7.5% returns assumptions or higher.

There are 80 plans with a 7% assumed return, a category that included CalPERS until July 2021 (when they announced a shift to 6.8%).
Among the 84 plans that are ahead of their peers in adopting more conservative return assumptions, just 34 have assumed returns 6.5% or less.