Long-term outlook for state pension plans uncertain

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Public pension plan officials said the long-term impact of the pandemic remains to be seen during a Wednesday online seminar sponsored by the Government Finance Officers Association.

Public pension managers in Illinois, Kentucky, and Missouri say public pension plans face much uncertainty although the COVID-19 pandemic has not yet had a significant impact on their plan finances.

The pension plans already received their 2020 funding by the time that the initial economic shock wave occurred in March with a plunge in the stock market coupled with stay-at-home orders and unprecedented nationwide layoffs over a compressed period of time.

However, the long-term impact of the pandemic remains to be seen, the officials said during a Wednesday online seminar sponsored by the Government Finance Officers Association.

Moody’s Investors Service reported last month that in Illinois “some governments, both large and small, have little flexibility to pull back on contributions without risking the solvency of their retirement systems.”

“As a result, pension-related credit risks are higher today than during the last recession,” Moody’s said.

Mark Nannini, chief financial officer for the Illinois Municipal Retirement Fund with $45 billion in assets under management as of the end of 2019 for 177,809 active members and 124,170 inactive members, said investment income has dropped in 2020.

“Illinois is a high property tax, high sales tax type state, and with businesses being closed for such a long time as well as the unrest that has taken place, we anticipate those revenues going down significantly,” Nannini said.

Nannini expressed concern that “there may furloughs, there may be layoffs which will lead to other things, including not making contributions based on the current liability stream going forward.”

Nannini said his plan gets funding from more than 3,000 employers and member contributions.

Mark Whelan, chief financial officer for the Kentucky state Teachers’ Retirement System, said, “All the plans in the state have gotten all the contributions. There hasn't been any talk about pulling back any funding.”

There are questions about fiscal years 2021 and 2022, however, Whalen said.

“Obviously general revenues are down,” said Melissa Rackers, chief financial officer for Missouri Local Government Employees Retirement System (LAGERS).

Rackers said that what she’s hearing at the local government level is “a mixed bag.”

Small towns along the Missouri River that have casinos “are struggling because the casinos have been closed for a couple of months now,” she said. In addition, “Public hospitals in Missouri have been struggling for the last couple of years and this certainly is not helping them out.”

However, there are other small communities that are “faring okay,” said Rackers, because they don’t have many cases of COVID-19 and their local residents are spending their money locally rather than driving to larger towns to buy the groceries or go to restaurants.

An instantaneous poll of the GFOA participants in the seminar found that only 20% out of 763 said their governmental unit has enacted furloughs or layoffs. Sixty-six percent said no layoffs or furloughs are planned while 14% weren’t sure if there will be any.

The stock market has rebounded from late March when the impact of the pandemic appeared to be dire.

On March 24 Moody’s Investors Service said the market crash and the economic fallout from the coronavirus had led to nearly $1 trillion in investment losses for U.S. public pension funds.

A March 20 snapshot of market indexes showed average investment losses at around 21% for the fiscal year ending June 30, Moody’s said at the time.

The aggregate funded ratio for U.S. state pension plans decreased by an estimated 12.2 percentage points during the first quarter of 2020 ending the quarter at 62.6%, according to Wilshire Consulting, the institutional investment advisory unit of Wilshire Associates Incorporated.

The quarterly change in funding resulted from a 15.7% decrease in asset values and a 0.7% increase in liability values. The aggregate funded ratio is estimated by Wilshire Consulting to have decreased 12.2 percentage points calendar year-to-date and 9.3 percentage points for the trailing twelve months.

The first quarter’s funded ratio was at its lowest level in the 30 years that Wilshire Consulting has been aggregating data for state pension plans.

In contrast, Wilshire Consulting said the aggregate funded ratio for U.S. state pension plans increased by 2.6% during the fourth quarter of 2019 ending at 76%, a 9.8% increase from December 2018.

Whalen of the Kentucky Teachers’ Retirement System said that despite all the market volatility this spring the S&P 500 is down only around 3.5%. “So what we're seeing is that our asset levels are getting close to where they were December 31 anyway,” he said, noting that his plan is prepared to “do the best we can with this volatility.”

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