Public Fund Survey

Summary of Findings for FY 2023                                                                                                         November 2024

 

About the Public Fund Survey

The Public Fund Survey is an online compendium of key characteristics and trends affecting the nation’s largest public retirement systems. The Survey is prepared by the National Association of State Retirement Administrators.

First published in 2003 based on FY 02 findings that including comparatives from FY 01, this marks the 22nd edition of the Public Fund Survey Summary of Findings. The Survey contains data on public retirement systems that provide pension and other benefits for 13.4 million active (working) members and 10.9 million annuitants (those receiving a regular benefit, including retirees, disabilitants and surviving beneficiaries). At the end of fiscal year 2023, systems in the Survey held combined defined benefit plan assets of $4.75 trillion. The membership and assets of systems included in the Survey comprise nearly 90 percent of the entire state and local government defined benefit plan community. Since FY 13, portions of survey data have been collected from Public Plans Data (PPD), an online, interactive resource containing public retirement system information culled chiefly by the Center for Retirement Research at Boston College (CRR) from public retirement system annual financial reports and actuarial valuations. In addition to the CRR, the PPD is sponsored also by NASRA, MissionSquare Research Institute, and the Government Finance Officers Association. This report, focusing on FY 23, uses graphs and narrative to illustrate and describe changes in selected key elements of public retirement systems and the pension plans and funds they oversee. 

Some of the information in this report is presented in the context of changes to median, or midpoint, data. Presenting changes based on a median, rather than aggregate (total) basis, reduces the effects of very large systems and plans those with extreme or exceptional results, enabling readers to focus on the experience of a more typical plan instead of results that could be skewed by the experience of one or a few outliers.

Summary of Findings 

Figure A plots the aggregate actuarial funding level and the combined actuarial value of assets and liabilities among plans in the Survey since its inception in FY 2001. The aggregate funding level in FY 23 was 76.4 percent, up from 76.1 percent in FY 22. The FY 23 increase in the aggregate funding level is attributable chiefly to relatively strong investment returns in FY 23 and for the five years ended in FY 23. These returns are discussed below and shown in Figure O.

The aggregate actuarial value of assets grew in FY 23 by 4.7 percent, from $4.49 trillion to $4.70 trillion. The actuarial value of assets reflects the time periods most plans use to phase in investment gains and losses, a calculation also known as actuarial smoothing. Smoothing reduces year-to-year volatility in a pension plan's funding level and required cost.

Smoothing periods for plans in the survey range from zero, meaning no smoothing, to 10 years. A few plans do not smooth their actuarial value of assets, instead reporting their funding condition using the market value of assets.

Combined actuarial liabilities of plans in the Survey grew by 4.4 percent, from $5.89 trillion to $6.14 trillion. Liabilities change as a result of four factors: a) because liabilities are a present value, they increase at a rate of interest equal to the prior year's discount rate; b) new benefit accruals resulting from active participants accruing an additional year of service credit; c) payment of benefits to retired participants (which reduces liabilities); and d) changes to actuarial assumptions and actuarial experience that differs from assumptions.

Since the market decline of 2008-09 and the Great Recession, every plan in the Public Fund Survey has reduced its most consequential actuarial assumption - the assumed rate of investment return. These lower investment return assumptions have created strong headwinds to efforts by public pension plans and their plan sponsors to improve funding levels. The pace of changes to the investment return assumption has slowed markedly in recent years, chiefly since 2021, when the rate of inflation rose sharply. Many plans also have adjusted other actuarial assumptions, including mortality assumptions to reflect longer lives. Like a lower investment return assumption, improved mortality assumptions result in a reduced plan funding level and higher cost, as plan participants are projected to receive benefits for a longer period of time.

See the NASRA issue brief on investment return assumptions. 

Figure A

FY 23 funding levels of the 130 plans in the Survey are depicted in Figure B. The size of each circle is roughly proportionate to the size of each plan's actuarial liabilities - larger bubbles reflect larger plans and smaller bubbles reflect smaller plans. The median funding level is 76.9 percent and the range is 25.2 to 106.9 percent. This chart illustrates the wide distribution of funding conditions among public pension plans, one outcome of the unique combination of the actuarial experience, assumptions, and methods employed by each plan in the Survey. 

Figure B

Figure C plots the median annual change since FY 02 among plans in the Survey in the actuarial value of assets and liabilities. For a pension plan’s funding level to improve, its actuarial value of assets must grow faster than its liabilities. At a median rate at or below 4.0 percent for the sixth consecutive year, liability growth remains below historical rates and extends a trend of lower rates of liability growth that began following the Great Recession. Lower liability growth generally is due to factors that vary by plan, but typically include lower interest accruals due to the wave of reductions to assumed rates of investment returns; actual inflation below expectations (which generally results, among other things, in slower salary growth); plan maturity (i.e., fewer active (working) participants relative to the number of annuitants); and the effects of many reforms (predominantly reductions) in pension benefits enacted in recent years. Rates of liability growth in previous years would have been even lower were many plans not also reducing their investment return assumption (see Figure P), and adjusting mortality assumptions to reflect longer lives, changes that increase a plan’s liabilities.  

As discussed previously, most plans smooth, or phase in, their investment gains and losses for the purpose of reducing volatility in the plan’s funding level and required cost. Approximately two-thirds of plans in the survey smooth their investment gains and losses over five years; four-year smoothing is the second-most common period. The remaining plans phase in gains and losses over periods that range from zero (meaning no smoothing and using only the market value of assets), to 10 years.

Because five years is the predominant period used by plans to recognize investment gains and losses, combined with the significant effect that investment performance relative to a plan’s investment return assumption has on the plan’s funding level, a plan’s five-year investment return  (as shown in Figure O) can be instructive in discerning the effect of recent market performance on the funding level of individual plans (where relevant) and in the aggregate. For example, in the case of a theoretical plan with an investment return assumption of 7.0% and an actual annualized five-year investment return of 6.0%, assuming the plan achieved its other actuarial assumptions, that plan’s funding level is likely to be lower because of its actual investment return underperforming its assumed investment return.

Figure C

The Survey measures two types of retirement system members: actives and annuitants. Actives are those who currently are working and earning retirement service credits; nearly all actives also make contributions toward the cost of their pension benefit. Annuitants are those who receive a regular benefit from a public retirement system. Annuitants are predominantly retired members, and those who receive a disability benefit (disabilitants), and survivors (mostly surviving spouses) of deceased retired members.

As shown in Figure D, FY 23 marks the first year in the history of the Public Fund Survey in which the median rate of increase in active participants outpaced the median rate of increase in annuitants. This development is driven by a median rate of increase in annuitants below two percent for the first time since the Survey’s inception, and a median rate of increase in active participants above two percent for the first time since FY 06. Growth in annuitants continues to trend slower, with FY 23 marking the eighth consecutive year in which median annuitant growth was below 3.5 percent.  The pattern of change in the number of active members is consistent with US Census Bureau reports showing steady increases in the number of state and local government employees since early 2022. 

FY 23 marks the first year in which the overall ratio of actives to annuitants did not decline. In FY 23 this ratio held steady at 1.25, after declining slightly to that level in FY 22, from 1.26 in FY 21. 

A low or declining ratio of actives to annuitants is not necessarily problematic for a public pension plan. This is because the typical public pension funding model features accumulation, during plan participants’ working years, of assets needed to fund their expected retirement benefits, in anticipation of higher rates of payout as members retire. Ideally, a plan will have accumulated the present value of all required assets to fund a retiree’s benefit through the end of their expected life.

When combined with an unfunded liability, however, a low or declining ratio of actives to annuitants can cause financial distress for a pension plan sponsor. An unfunded liability represents a shortfall in accumulated assets and results in a cost of the plan above the normal cost (the cost of benefits earned each year); this additional cost is required to amortize or eliminate the unfunded liability over a period of years. (See more: Overview of Public Pension Plan Amortization Policies, NASRA, April 2022) A lower ratio of actives to annuitants results in applying costs to amortize a plan’s unfunded liability over a relatively smaller payroll base, which increases the cost of the plan as a percentage of employee payroll. Thus, although a declining active-annuitant ratio does not, by itself, pose an actuarial or financial problem, when combined with a poorly-funded plan, a low or declining ratio of actives to annuitants can result in higher required pension costs.

Figure D

On a market value basis, as of FY 23, systems in the Survey held a combined $4.75 trillion in assets, an increase of 3.7 percent from FY 22. This rate of increase is close to the average year-over-year change in the market value of assets for the entire measurement period, since FY 02, which is 4.5 percent. Figure E, which plots the fiscal year-end value of public pension funds in the Survey, reflects the result of market volatility in recent years. As the aggregate market value of funds in the Public Fund Survey has grown by roughly $1.6 trillion over the past decade, these same plans also have paid out approximately $2.8 trillion in benefits. Collectively, the portion of assets held by the systems in the Survey represents nearly 90 percent of the total FY 23 public pension assets identified by the U.S. Census Bureau.

Figure E

Figure F plots the combined revenues and expenditures of the systems in the Public Fund Survey. The green line reflects investment gains and losses, which vacillate as investment markets fluctuate. Blue bars indicate contributions, from employees and employers, and red bars show benefit payments. Contributions and benefit payments grow at mostly steady and predictable rates, while growth or decline in investment earnings is much more volatile, corresponding with volatility in global capital markets. Because most plans pay out more each year in benefits than they receive in contributions, contributions are used to pay current benefits (as shown in Figure I), while most investment earnings accrue to pension trust funds. Pension trust funds are established for the sole purpose of paying benefits and funding administrative costs. The benefits paid by public retirement systems are paid from these trust funds, not from state and local government operating budgets or general funds.

Growth in levels of contributions and benefits is mostly stable and predictable over time. Investment earnings, which comprise over 60 percent of public pension revenues over the past 30 years, vacillate, often appreciably, depending on market performance (see Figure N). 
 

Figure F

Figure G plots the distribution of the median annual change in payroll from FY 02 to FY 23 among plans in the Survey for which this data is available. (The chart excludes plans in the Survey that are closed to new hires. Closed plans have no new, active members joining, and the number of annuitants grows each year as active members retire or terminate.)

As Figure G shows, the median change in payroll spiked to nearly seven percent in FY 23, the highest level ever recorded in this timeseries. Previously median payroll growth was either negative or in decline from the prior year from FY 08 to FY 12, increasing slowly but steadily from FY 13 to FY 18, before reaching the lower end of a more typical range in FY 19 and FY 20. Declining state and local employment and slower state and local employee wage growth in FY 21 resulted in a sharp decline in the median change in payroll, to below two percent in FY 21, which was the lowest level since FY 13. Accelerating growth in state and local employment and wage growth resulted in a sharp increase in median payroll growth, to nearly four percent since FY 22. This marked the highest level since FY 08, which spiked again to nearly seven percent in FY 23, the highest level recorded in the Survey. Combined with the median rate of growth for FY 22 of nearly four percent, FY 22 to FY 23 marks the highest rate of median payroll growth of any two-year period in the history of the Survey. 

The payroll experience pattern of public pension plans following the Great Recession is corroborated by information provided by the U.S. Bureau of Labor Statistics, indicating that state and local employment levels and wage growth have accelerated in recent years, driving higher median payroll growth. Since FY 21 state and local governments have added nearly 1.7 million jobs. State and local employee wages have grown at an annualized rate above four percent since the second quarter of FY 22, and at or above five percent in some recent quarters. 

Payroll growth affects a pension plan actuarially because the long-term funding of most pension plans is based partly on expected growth in a pension plan’s payroll base. When a plan’s payroll grows at a rate less than expected, the base that is used to amortize the plan’s unfunded liability is smaller, meaning that the cost as a percentage of payroll of amortizing the unfunded liability is larger. This situation is analogous to a mortgage, in which the mortgage-holder anticipates a growing salary to make her or his monthly mortgage payment. When salary growth does not materialize as anticipated, the cost of the mortgage payment as a percentage of expected income is higher.

Many pension plans in recent years have reduced their payroll growth assumption to reflect changing economic realities and expectations. As a result, higher payroll growth experience and assumptions for future payroll growth are converging. 

Figure G

Figure H presents the distribution of change in payroll from FY 22 to FY 23, and the median payroll growth, for the 119 plans in the Survey that are open to new hires and that report this metric. The individual plan experience ranged from a decline of 3.1 percent to an increase of 16.3 percent, creating a wide range of outcomes between those two extremes. Despite recent growth, the impact of sluggish growth in previous years is still impacting many plans. Of the same 119 plans, only 35, or 29 percent, have a higher covered payroll in FY 23 than they would expect had they achieved three percent annual growth since FY 09. The remaining 84 plans, or 71 percent of the sample, have a lower covered payroll in FY 23 than they would have had following three percent annual growth since FY 09. 

Figure H

Figure I plots the median external cash flow as a percentage of assets since FY 01. External cash flow is the difference between a system’s revenue from contributions, and payouts for benefits and administrative expenses. External cash flow excludes investment gains and losses. Dividing a system’s cash flow into the market value of the system’s assets produces the measure of cash flow as a percentage of assets. A growing number of annuitants, combined with slow or negative growth in active members, will result in a reduction in a retirement system’s external cash flow. Conversely, a growing asset base will offset a rate of negative cash flow. Contributions made below the actuarially recommended rate can also contribute to a plan’s negative cash flow.

Nearly all systems in the survey have an external cash flow that is negative, meaning they pay out each year more in benefits and administrative expenses than they collect in contributions. Negative cash flow is not, by itself, an indication of financial or actuarial distress: the purpose of accumulating assets is to eventually pay them out as benefits. As a system matures, i.e., as its members age, and ultimately retire, the system will inevitably pay out in benefits relatively more compared to a less mature, younger system with fewer retirees. A lower (more negative) cash flow may require the system’s assets to be managed more conservatively, with a larger allocation to more liquid assets to meet current benefit payroll requirements. For example, in 2018, the Kentucky Public Pensions Authority reduced the investment return assumption of one of its plans—the Kentucky Employees’ Retirement System—to 5.25 percent, because the plan’s funding level (then below 20 percent) required the fund to maintain a relatively large portion of its assets in more liquid securities that do not generate a significant investment return.

The median external cash flow declined slightly in FY 23, to -2.1 percent from -2.0 percent in FY 22. FY 23 marks the third consecutive year in which median cash flow is above -2.5 percent following six years at or below that level. This development is most likely a result of a) higher levels of pension contributions received by many plans, including excess contributions above actuarial requirements, and b) slower rates of growth in the number of annuitants (see Figure D), to whom benefits are paid, in recent years.

Figure I

Figures J and K reflect changes in median employee and employer contribution rates. Figure J includes active members and employers for participants who also participate in Social Security; Figure K includes those participants and their employers who do not participate in Social Security. These contribution rates apply predominantly to general employees and public school teachers and do not reflect those for public safety workers and narrow employee groups, such as legislators, judges, etc.

Approximately one-quarter of employees of state and local government do not participate in Social Security, including approximately 40 percent of all public school teachers and a majority to substantially all state and local government workers in seven states: Alaska, Colorado, Louisiana, Maine, Massachusetts, Nevada, and Ohio.

Nearly every state has made changes to its pension plan(s) design or financing arrangement, or both, since 2009; the most common change has been an increase in required employee contribution rates. This trend is reflected in Figures J and K. Following a lengthy period at 5.0 percent, Figure J shows the median employee contribution rate for employees participating in Social Security holding at 6.10 percent. Median contribution rates for non-Social Security-participating employees remained steady at 9.0 percent, the median rate since FY 20, following many years at 8.0 percent. 

Contribution rates among employers whose employees are both in and out of Social Security have increased considerably since the inception of the Survey. This increase is due primarily to the increase in unfunded pension liabilities and, more recently, a strengthened effort among many employers to increase their contribution effort to pay a greater share of the actuarially determined contribution. FY 02, the first year of the contribution rates measurement period, was at or near the all-time low point for employer contribution rates. These low rates were a result partly of strong investment earnings in the late 1990s, as aggregate unfunded liabilities for the public pension community were around zero. These rates reflect plans for general employees and teachers and predominantly exclude plans whose members are public safety personnel, judges, and legislators.

      Figure J                                                                                            Figure K

Figure L displays the range of employer contribution rates paid in FY 23 for plans whose members participate in Social Security. The lowest rate is 5.8 percent and the highest is 77.35 percent.

Figure M displays the range of employer contribution rates paid in FY 23 for plans whose members do not participate in Social Security. The lowest rate is 7.66 percent and the highest is 57.99 percent.​

Figure L                                                                                            Figure M

Figure N presents the cumulative sources of revenue into public pension funds for the 30 years ended in 2023. Although investment earnings are the most volatile source of revenue, over time, these earnings also are the largest source, consistently accounting over 30-year periods for between 60 percent and 65 percent of public pension fund revenue. This chart illustrates the role that investment earnings play in funding public pension benefits. The large portion of revenue from investment earnings also illustrates why even a relatively small change in a plan’s investment return assumption can have a large effect on the plan’s funding level and required cost. 

Figure N

As shown in Figure O, according to investment consultant Callan, the median investment return for plans with a FY-end date of June 30, 2023, (the FY-end date used by approximately three-fourths of the funds in the survey), was 9.3 percent; the return for plans whose fiscal year-end is 12/31 (used by most other plans) was 13.0 percent. These returns mark a sharp reversal of rates from the prior fiscal year, FY 22, when one-year returns for each of the FY-end dates were negative. As discussed in the narrative accompanying Figure C, because most plans phase in, or smooth, their investment gains and losses over several years (five years for most plans), returns over periods of four or five years are more consequential to funding levels than the return of any single year. 

Figure O

Of all actuarial assumptions, a change to a public pension plan’s investment return assumption typically has the greatest effect on the plan’s funding level and its projected long-term cost. This is because, as shown in Figure N (above), over time, most of the revenue of a typical public pension fund comes from investment earnings. 

As shown in Figures P and Q, from the beginning of this survey (and for several years preceding), until FY 11, the median investment return assumption used by the 131 public pension plans in the Survey was 8.0 percent. Following the sharp decline in global capital markets in 2008-09 and the decline in interest rates and projected returns on major asset classes that followed the Great Financial Crisis, every plan in the Survey reduced its assumed investment return, many more than once. This trend resulted in a reduction to the median return assumption to 7.0 percent in FY 21, where it remained in FY 23 (and FY 24). Figure P compares the distribution of investment return assumptions for each fiscal year since the inception of the Survey; Figure Q illustrates the steady reduction in assumed rates of return, particularly since 2009. 

Reducing a plan’s investment return assumption increases its projected liabilities and the plan’s cost. The extended period of reductions in the investment return assumption has created a strong headwind to pension plans’ efforts to improve their funding level: even as benefit levels have been reduced and contribution rates increased, funding levels for many plans have struggled to improve due partly to lower investment return assumptions.

Figure P

Figure Q reflects the investment return data shown in Figure P (above) after distilling the data into an average and median. Notably, the median return has held steady for four years, from FY 21 to FY 24, likely a result primarily of the higher rate of inflation in the U.S. since 2021, which has coincided with, if not contributed to, higher interest rates and higher expected nominal returns on major asset classes.

Figure Q

Figure R plots the average asset allocation of 90 funds in the Public Fund Survey since FY 05. The average allocation to public equities—traditionally the asset class with the largest asset allocation among public pension funds—steadily declined since the major drop in global capital markets in 2008-09. This secular decline in the allocation to public equities reached its lowest point--42.2 percent—in FY 22 since the beginning of the measurement period, reflecting a combination of shifting target allocations and the sharp decline in equity markets in 2022. The average allocation to equities rose in FY 23, due chiefly to the improved performance of equities in 2023. 

Similarly, at 20.6 percent, the average allocation to fixed income in FY 22 also reached its lowest level in the history of the Survey, reflecting both smaller target allocations to fixed income and declining bond market values in 2022. The allocation to fixed income rose slightly, to 20.8 percent, in FY 23 due to improved asset class performance. Allocations by public pension funds to public equities and bonds historically comprised the bulwark of public pension portfolios. This predominance has been diminished by continuous growth in allocations to alternatives and real estate: the average allocation to alternatives (chiefly private equity and hedge funds) in FY 23 is the highest in public pension fund history.  

Figure R

• Appendix A: Public Retirement System Assets and Membership

  • ​View and download Appendix A data

• Appendix B: Actuarial Funding Levels for FY 23

  • ​View and download Appendix B data

• Download a PDF version of the FY 23 Summary of Findings

See Also

• Public Plans Data

• NASRA Issue Briefs, Papers & Analysis

 

Prepared by: Keith Brainard and keith@nasra.org 202-624-8464

Alex Brown alex@nasra.org 202-624-8461