Public pension health a mixed bag

The Equable Institute wrapped up its annual report on the health of public pensions with a mix of good and bad projections along with notes of caution about what's coming down the pike.

"The significant degree of financial uncertainty public pensions face going into 2026 has put a dampener on what would otherwise be a strong year for state and local retirement systems," said Equable executive director Anthony Randazzo.

"Three consecutive years of growth has public plans in a much better position than in 2022, but still a fragile condition."

According to Equable's numbers, the aggregate funded ratio for U.S. state and local retirement systems is on track to improve to 82.5% in 2025 from 78.0% in 2024, based on data available through Dec. 31, 2025.

They estimate that unfunded liabilities will total $1.27 trillion for the 2025 fiscal year, compared to $1.54 trillion at the end of 2024.

Healthy pension funds are an area of interest to the muni market as bond holders are sometimes second in line behind pension fund members for payback if a municipality goes bankrupt.

Underfunded pension funds can negatively impact municipal credit ratings, and some pension funds invest in municipal bonds.

The report focuses on the effects the One Big Beautiful Bill Act is expected to have on budgets as Medicaid costs are shifted onto the states.

Per the report, "Even in a non-recessionary environment, states encountered budget pressures in 2025 that are carrying over into 2026."

"Most notably, tax revenue growth has slowed as healthcare and education costs grew?and states will face even higher healthcare-related costs in 2026."

"The biggest thing to monitor in 2026 is how states will handle growing contribution rate pressures in the contexts of budget shortfalls," said Randazzo.

Market volatility could also play a role as the Trump administration continues to tinker with tariffs as penalty points.

"As the tariff-driven economic shock of April 2025 demonstrated, there is no significant ability for public plans to avoid a major market downturn," said Randazzo.

The report ranks individual states pension performance with Washington D.C., Tennessee, Nebraska, Wisconsin, Washington state, and Utah at the top of the list with pension funds that are currently overfunded.

The five states at the bottom of the list include Hawaii, New Jersey, Mississippi, Kentucky, and Illinois.

The end of the year numbers remains in line with the institute's update in October.

The average 2025 estimated rate of return shifted to 9.53% from 8.58% as measured from October to the end of the year after factoring in reported preliminary returns and final fiscal year market returns.

On the negative side, the average 2025 estimated funded ratio shifted to 82.5% from 83.1% based on updated data while the total 2025 unfunded liability estimate moved to $1.27 trillion from the previous estimate of $1.22 trillion.