Matrix assesses long-term financial health of state pensions: Washington

Washington was one of eight states in 2019 whose retirement benefits were at least 90% funded. The government was also an early adopter of pension stress tests – analyzes of the fiscal health of plans under different investment scenarios – which allow policymakers to monitor the impact of volatility in pensions. investments on plan balance sheets and public budgets.







The combination of a decade of rising pension contributions and the strong market recovery in 2021 has had a stabilizing effect on public pension plans. As a result, The Pew Charitable Trusts estimates that pension plan assets have grown by more than half a trillion dollars since 2011, leading to a funded ratio of 50 states – the share

pension liabilities backed by plan assets – of more than 80% and a total debt of state pension plans of less than $800 billion at the end of fiscal year 2021. This represents the highest since before the Great Recession and greatest progress in closing the state pension plan the plan funded gap — the difference between plan liabilities and plan assets — in this century.

However, not all public pension funds approach long-term fiscal sustainability, defined as government revenue matching expenditure without a corresponding increase in government debt. Although pension funds are currently enjoying skyrocketing returns on their investments – which the plans rely on to cover 60% of the benefits they pay out – Pew estimates that long-term returns will decline to around 6% per year, which is lower than most state pension plans currently budget.

To help policymakers navigate the uncertainty inherent in managing pensions and assess the resilience of their plans, Pew has developed a 50-state matrix of fiscal sustainability measures. The matrix highlights the practices of successful public pension systems, presenting critical data in a single table to facilitate benchmarking and evaluations of state plans. Specifically, these data points shed light on the historical outcomes of policy choices, cash flow measures that determine long-term solvency, and indicators of risk and uncertainty.

Why are the above measurements important and what do they mean?

  • Historical actuarial measures such as the funded ratio—the value of a plan’s assets as a proportion of pension liabilities—and the change in the funded ratio over time highlight the impact of past policies on the current financial situation of a plan. These measures are the basis of any tax assessment; however, they provide little information to assess future investment or contribution risks.
  • Current plan financial measures directly indicate whether the existing policy is sufficient to repay unfunded liabilities and help public employees and taxpayers determine whether a plan is following funding policies that target debt reduction or whether it is at risk to experience financial difficulties. The metrics are the operating cash flow ratio – the difference, before investment returns, between payments and contributions, divided by assets – and net amortization, which measures whether total contributions to a system of public pension would have been sufficient to reduce the pension debt if all actuarial assumptions (primarily investment expectations) had been met for the year. Based on historical cash flows and funding patterns, these measures help assess the risk of future underfunding or insolvency.
  • Government fiscal risk parameters, such as historical contribution volatility – the range between the lowest and highest employer contribution rate over a given period – and the regular practice of stress testing pensions, are designed to help policy makers when planning for cost uncertainty or volatility in the future. Since state and local budgets often bear much or all of the risks assumed by public pension plans, these metrics are critical for long-term planning and can prompt reforms if needed.

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