Public Pension Funded Levels Improve Amidst Rising Interest Rates

Since fiscal year 2019, financial markets have been jostled by a series of unusual events: 1) the onset of COVID; 2) the subsequent COVID stimulus; 3) declining interest rates; 4) rising inflation; and then 5) rising interest rates. Despite the volatility of asset values over this period, the 2023 funded status of state and local pension plans is about 78 percent, which is 5 percentage points higher than in 2019. This brief reports the change in the funded status of public plans; documents that, despite the turbulence, values for most asset classes are ahead of their 2019 levels; and then looks more closely at the major exception – fixed-income assets (“bonds†). The discussion is organized as follows. The first section shows trends in the funded status and costs of state and local pension plans. The second section documents the general performance of major asset classes since 2019 – highlighting the overall positive portfolio gains despite the relatively poor performance of bonds. The third section quantifies how much the rise in interest rates has hurt bond prices. The final section concludes that the funded status of pension plans has improved, with the recent rise in interest rates only marginally impacting their overall finances.