By: Russ Kamp, Managing Director, Ryan ALM, Inc.

According to the Milliman 100 Public Pension Funding Index (PPFI), the estimated aggregate funding for the top 100 public pension systems declined from 76.8% to 75.3% as of August 31, 2023. The change in the fund status was primarily driven by market losses during the month (estimated at -1.6%), which resulted in a decline of $74 billion along with negative cash flow of approximately -$10 billion. Total assets are estimated at $4.591 trillion at the end of August.

According to the Milliman chart above, there are presently 17 plans that have funded ratios of 90% or better, with three that are at 105% or better. Let’s hope that they are taking some risk off the table and not just letting this strong funded status be potentially harmed by market action. On the other hand, 41 of the largest US public pension plans have a funded ratio that is <70%, with 14 of those at <50% funded.

Unfortunately, the funded status of these plans may be worse since we know that the liabilities are being discounted at the ROA (roughly 7%) and not at a true market rate (FAS AA corporate rate) of approximately 4.5%. This difference is not nearly as bad as it was prior to the Fed’s aggressive interest rate campaign begun in March 2022, but it still under estimates the plan’s liabilities by about 1/3, which may lead to inappropriate asset allocation decisions.