How have public pension plans fared in the pandemic?
Accusations that state and local governments would use emergency federal aid to shore up their public pension plans are wrong, say public finance experts.
Senate Majority Leader Mitch McConnell, R-Ky., suggested weeks ago Congress should not provide direct aid to state and local governments for that reason and, more recently, has pointed out that some states are not experiencing revenue losses.
“State and local governments are going to try to keep people in their homes,” said Jeannine Raymond, director of federal relations for the National Association of State Retirement Administrators. “Keep people safe. Administer vaccines. Provide public services. That’s where the emergency money is going to go.”
Raymond said pension plan funding has remained relatively stable over the course of the year.
“While there was volatility in the market at the beginning of the year, that’s largely recovered,” Raymond said.
What the pandemic has done, she said, is to activate the continuity of service plans for operating remotely. “The pension checks have gone out on time and in full,” she said.
Douglas Offerman, senior director, and primary rating analyst for Fitch Ratings, agreed that markets have recovered since the spring.
“But it certainly serves as a reminder of the challenges that many pensions still have,” he said. “A lot of repair work has been done in the last decade. Discount rates are much lower. Contributions are generally higher and governments are contributing more.”
However, some public pension plans are notoriously underfunded including those in McConnell’s home state of Kentucky as well as those in Illinois and New Jersey.
Illinois added nearly $4 billion onto its unfunded pension liabilities in fiscal 2020 as statutorily based payments fell well short of actuarial requirements and amid lackluster investment returns dampened by the COVID-19 pandemic.
The Illinois unfunded liabilities rose $3.8 billion, or 2.8%, to a new peak of $141 billion in fiscal 2020 from $137.2 billion in 2019.
A pension brief published last week by the Illinois legislature’s Commission on Government Forecasting and Accountability reported that the five funds for teachers outside Chicago, state employees, public university professionals, general assembly members, and judges are 40.4% funded.
“Many governments still have a hill to climb when it comes to pension system funding,” said Offerman. “So the state of pensions varies tremendously.”
The COVID-19 pandemic has not created a crisis for most plans.
“For most governments, their pensions are manageable within their resource bases,” he added. “Nothing happens quickly with pensions. It requires commitment over time to strengthening funding or to eliminate costs to reap the benefits of those policy choices.”
Dan Doonan, executive director of the National Institute on Retirement Security, also noted the financial condition of public pension plans varies greatly across the states.
In Oregon, California, New York, and Pennsylvania, employers have established side accounts that operate similar to rainy day funds that can be used to fund pension plans during tough economic times.
Some multiemployer plans in California and Indiana have established a “withdrawal liability” that ensures when one of the employers drops out, it will pay an exit fee for its share of the costs. “It’s not intended to be punitive so much as you can’t leave your share of costs on others,” Doonan said.
Indiana addressed the underfunding of its Teachers Retirement System in the mid-1990s with a so-call “partition” approach by creating a pre-funded system and separating the old plan. Over time the balance of liabilities has shifted with only 15% of active teachers remaining in the earlier plan.
A number of states also have set up dedicated funding sources for their pension plans. Examples include New Jersey’s transfer of its state lottery; Oklahoma’s use of state lottery proceeds; the securitization of West Virginian’s tobacco settlement to fund the state Teacher Retirement System; Montana’s use of a coal severance tax; and the use of casino revenue in Kansas.
The Kentucky Legislature considered using 95% of sports betting revenue for pensions earlier this year without making a decision and may consider it again in 2021.
Another tool is pension obligation bonds. The National Institute on Retirement Security has not taken a position either favoring or opposing their use.
Over the last decade, “virtually every plan, close to every plan has made some changes to benefits, some on contributions,” Doonan said. “It’s very common to see new hires paying more for a lesser benefit.”
One major problem in Kentucky, according to Doonan, is that public-sector employers are outsourcing work so they are putting fewer workers into the pension plan and that creates a feedback cycle that pushes costs higher.
“It’s really difficult at the state level to right the ship if employers are undermining the plan like that,” he said.