Last month, Mitch McConnell shocked investors and infuriated several colleagues when he mentioned during a radio interview with a conservative talk show host that he would prefer giving states the ability to file for bankruptcy protection before allowing federal coronavirus money to bail out underfunded pensions.
McConnell’s critics exploded with rage, and conservative finance types were deeply chagrined, judging by their reactions on social media. But as anybody who has following the simmering national pension crisis should at least understand the point that the GOP Congressional leader was trying to make.
Just as Illinois was becoming a ‘hot spot’ for the coronavirus thanks to early signs of domestic transmission in Chicago, some pension industry trackers warned investors to ‘watch’ Illinois.
And according to some of the earliest data on how the March market collapses impacted these funds, it’s starting to look like – if anything – analysts underestimated the severity of the blow.
And now, just as the great American socialist revival has convinced teachers that they deserve more pay and better benefits (despite the fact that retired teachers keep drawing a paycheck until they die on top of social security), inspiring teachers strikes like those in W.Va, Kentucky and Oklahoma, states are facing up to the unavoidable reality that they will need to cut benefits for state employees.
Public pension plans lost a median 13.2% in the three months ended March 31, according to Wilshire Trust Universe Comparison Service data released Tuesday, slightly more than in the fourth quarter of 2008. March’s stock market plummet led to the biggest one-quarter drop in the 40 years the firm has been tracking.
“It was a horrible quarter for all public funds,” said Chicago Teachers’ Pension Fund Investment Chief Angela Miller-May.
Stocks bounced back in April, making up a significant chunk of the losses. But absent a full and speedy recovery, pension losses are poised to drive up already-burdensome retirement costs for governments.
“There will be a lot of pressure to cut benefits,” said Don Boyd, co-director of the State and Local Government Finance Project at the University at Albany’s Rockefeller College.
State and local governments “are trying to figure out how to not cut school aid too deeply, not cut Medicaid too deeply, not raise taxes,” Boyd said. “Pension contributions are pretty far down the list of things they want to pay for.”
And as bad as this looks, WSJ warns that the situation at most funds is probably even more dire.
In one sign of how high the stakes are for public pensions, Jack Ehnes, chief executive of the California State Teachers’ Retirement System for the past 18 years, said in March he would postpone his planned September retirement until June 2021, in part to help navigate through the pandemic at the fund, which held $227 billion as of March 31.
As bad as the first-quarter returns were, they likely don’t show the full extent of the pension losses because reports on the value of private equity, real estate, infrastructure and other private assets often arrive one quarter late.
“Most of the conversations that we’re having with our real-estate managers is what percent of rent were they able to collect? What does occupancy and leasing look like going forward?” said Ms. Miller-May of the Chicago Teachers’ Pension Fund.
Pension checks come from a combination of money set aside by government employers, money from employee paychecks, and investment returns earned on that money. When investment returns fall short, it typically falls to governments to allocate more of their revenues to make up the balance.
Executive Director Sandy Matheson of the nearly $15 billion Maine Public Employees Retirement System projects that the state’s annual pension contribution will rise to $927 million from $808 million if stocks fall back to March 31 levels by the time the pension ends its fiscal year on June 30.
Of course, states don’t presently have the power to file for bankruptcy, just like the federal government can’t file for bankruptcy. Changing such a law would probably be a massive self-inflicted blow, as it would undermine the full faith and credit of the US. Arguably, the country is already on the path to financial ruin; allowing states to declare bankruptcy would more or less seal America’s fate as a future failed state. But the pension issue shows why McConnell in particular might be more amendable to state bankruptcy filings: His home state, Kentucky, has one of the most dangerously underfunded pension systems in the country, a theme we’ve touched on before.
Read more like this…
- The Greatest Debt Implosion That’s Spreading Like Coronavirus
- Details Of $2 Trillion Coronavirus Stimulus Package Emerge
- Coronavirus Economic Collapse Is Here: U.S. Unemployment Rate To Hit 20 Percent Or More
At least one of its funds spends virtually all the money it takes in every year on paying out benefits (leaving nothing for those who are contributing to the fund right now).
In Kentucky, home to some of the nation’s worst-funded state pension plans, state senators in mid-March approved a proposal to make $1 billion worth of teacher pension contributions contingent on an overhaul of the teacher pension plan, but the legislature ultimately rejected the idea. Two years ago, the previous governor’s push to cut teacher pensions sparked demonstrations by teachers at the state capitol.
Another Kentucky pension fund for state workers in nonhazardous jobs pays out in benefits almost all of the $1 billion it gets from the legislature every year.
Retirees in the plan, which has been changed for new workers, earn 80% of their pay after 40 years of service and also receive health insurance. The average pay is about $41,000. After the past quarter, David Eager, the executive director, said he is a little less hopeful that investment returns will help build the fund back up.
Even before the crisis, when the economy was doing great and stocks were massively up on the decade, pension funds were still in trouble. And after a decade of trying to goose returns by going all-in on stocks, a situation like what PTJ described in a recent investing paper would literally render most public pensions insolvent by 2030 as US equities enter a secular decline.
Even before the record first-quarter losses, public pension plans were $4.1 trillion short of the $8.9 trillion they will need to cover promised future benefits, according to the Federal Reserve.
Decades of overoptimistic return assumptions, insufficient pension-fund contributions and lengthening lifespans created massive shortfalls in public pension funds that the 11-year bull market didn’t cure.
Over the past decade, public pensions had ramped up stockholdings and other risky investments in an effort to meet aggressive return targets that average around 7%, according to a survey by the National Association of State Retirement Administrators.
For the 20 years ended March 31, public pension-plan returns have fallen short of that target, however, returning a median 5.2% according to Wilshire TUCS.
Since the last recession 10 years ago, governments around the country have jacked up their yearly pension contributions and slashed benefits for new hires, sometimes shifting the employees to 401(k)-type plans that don’t promise more than investments can earn. Some pension benefits promised to workers, such as cost-of-living increases, also have been cut, but courts have generally blocked cuts for people who have already been hired.
And while markets rebounded in April, there are still ~2 months left in the quarter for things to go awry. And thanks to the collapse in employment, governments won’t be able to rely on as many employees contributing to the system. Leaving statehouses on the hook for the money as judges continue to rule that the benefits promised to workers for the most part must be delivered.
Article originally appeared here…