No one—absolutely, no one—knows how long it will take for the economy to recover from the coronavirus crisis. Much of that will depend on how Americans continue to respond to the pandemic, but also on how governments manage companies returning to business as usual. Researchers project that the halting, slow road to recovery will last well into next year.
But for state and local government officials, where the economy will be in June will determine how much stress will be on the nation’s retirement systems as they draw up their budgets for the following year.
Public pensions are already expected to have lost money across the board this fiscal year from the recent market rout. But a severe economic outlook in June could further constrain balance sheets, as government officials focus—rightly so—on addressing the public health crisis, through measures such as coordinating medical relief efforts and delivering unemployment benefits.
“We expect there to be pressure in all areas of spending,” said Greg Mennis, director of research, public sector retirement systems at the Pew Charitable Trusts.
That could further impact employer contributions and the funded status of public plans. The pressure is already on in all parts of the country. In New Mexico, lawmakers created a $100 million relief fund for small businesses using the state’s permanent fund.
In Pennsylvania, the State Employees’ Retirement System (SERS) offered COVID-19 specific aid to members, but also said it would roll back any balances for retirees in its defined contribution plan to help that portfolio recover.
In Rhode Island, after securing a $300 million emergency line of credit, the state treasurer penned a letter in a local newspaper assuring state residents that pensions will not be used to plug budget holes.
That was a sore subject in the 1990s, when pension funds were raided after hundreds of thousands of people lost access to their bank funds.
Virtually all public pension funds, even the ones that haven’t increased their asset bases in the past year, will have enough to pay benefits and weather this crisis after some hunkering down.
Clearly, though, once the crisis finally is over, the pandemic will widen the already-yawning gap between the plans that are at the front of the pack and all the rest.
As it is, public pensions have hardly recovered from the last financial crisis. Before 2008, most plans were close to fully funded. But by 2017, state and local retirement systems averaged a 72% funded ratio, according to the Center for Retirement Research. That trend is likely to continue post-coronavirus.
A closer look at pension plans reveals an even starker picture. In 2017, the top third of pension plans averaged 90%, while the bottom third were just 55% funded.
The leaders will continue to do well. Plans in South Dakota, Tennessee, and Wisconsin have funded ratios close to or at 100% and are virtually fully funded. All have paid their actuarial contributions on time. All have cautionary policies in place, such as to adjust cost-of-living benefits or employer contributions in the event of a downturn. Some plans have also benefited from stress testing their portfolios early on for downside risk.
But a few plans, the ones that are funded way below that 55% bottom third funded ratio, face severe challenges that could be exacerbated in five years, according to the Center for Retirement Research. “It’s really that bottom group that has any concerns really going forward, and, of those, only a few are really facing dire challenges a few years out,” said Alicia Munnell, director of the Center for Retirement Research at Boston College.
That spells trouble for plans already in bad shape in states such as Illinois, Kentucky, and New Jersey, which may have to get an infusion of contributions or figure out how to operate on a pay-as-you-go basis.
In New Jersey, which is roughly 40% funded, the state treasurer recently froze nearly $1 billion in spending to help weather the pandemic, which she warned would have an adverse effect on the state pension.
Meanwhile, the Kentucky Employees Retirement System (KERS) is one of the poorest pension plans in the nation with a roughly 16% funded ratio. Earlier this year, state lawmakers sought to change how the state operated its systems by charging public employers their share of the fund’s liability.
As of fiscal year 2019, the Kentucky pension fund had $17.7 million in liabilities, on roughly $2.9 million in assets.
Virtually all pension plans can get by in the near term and support their plan participants and beneficiaries. But lawmakers will have to take a close look when the pandemic is over to see how they can support some pension plans so they won’t get left behind.