A new report ranking US public pension funds by their ability to pay future benefits suggests several will likely go insolvent as a result of COVID-19.
The issues facing public pension funds in the US are widely known, and while it's not clear how exposed to the recent market correction funds were, analysis from Wirepoints of 2018 data shows some may have reached the point of no return.
Looking at asset-to-payout ratios of 148 state and local pension funds with more than US$2 billion in assets, the worst-off funds are those that are already well known for their pension shortfalls. These are in Kentucky, Illinois, New Jersey and Connecticut.
Using the asset-to-payout ratio, a measure used by Moody's to measure pension funds' health, Wirepoints determined some funds had assets equal to just a few years' worth of benefits.
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In contrast, the strongest funds had assets equal to 20 years or more of payouts before COVID-19 hit, with some over 40 years. The strongest fund, DC Police & Fire, is 114% funded and has an asset-to-payout ratio of 54.8 years.
Kentucky's Employee Retirement System ranks as the weakest fund, with just 2.5 years of assets to fund benefits.
According to Kentucky's Bluegrass Institute for Public Policy Solutions chair Aaron Ammerman, this particular fund is at a level no public pension has ever recovered from.
Other funds in the state are in a similarly tight spot, with both county-level and teacher funds with less than 10 years' worth of payouts left.
Illinois looks to be the state in the most trouble, with six of its funds ranking among the 15 weakest in the nation. Three funds are at the state-level, the other three are Chicago-based and all looked able to sustain just eight years or less in payouts two years ago.
Similarly, in 2018 the New Jersey Teacher's Fund had US$26 billion - enough to cover just six years of benefits. This sees it rank fourth for weakness, while the state's public employee plan comes in at 15th spot as it can cover just eight years' worth.
The report says that if the downturn lasts throughout the rest of the year, the state of New Jersey won't have the liquidity to pay pensions in full or, possibly, at all.
According to the report, if funds run dry they will likely switch to pay-as-you-go systems, meaning pensioners will be forced to rely on the operating budgets of employers to get their retirement funds.
"Collapsing to pay-go status is risky given that sponsoring governments would have to make even bigger contributions directly from the operating budgets. With no pension assets left, they'd be responsible for paying the full amount of pension benefits each year," the report reads.
"Some governments can't afford that considering they're at risk of going broke themselves."
The report says that's the case for the city of Chicago which was junk rated by Moody's before the pandemic hit, already had about US$240 billion in pension debt and has 53% of its revenues directly exposed to COVID-19.
According to a recent report from Pew Charitable Trusts, one in five state tax dollars is already going to pay for pensions in Illinois before factoring in any revenue declines associated with the pandemic.
Of the 17 Illinoisan public pension funds covered by the Wirepoints data, 12 have asset-to-payout ratios of less than a decade. All others have ratios of less than 19 years.
Illinois is now seeking a bailout of its pension funds, with US$20 billion requested in direct assistance for pensions as part of a wider US$42 billion bailout request mad in mid-April.
The move has been met with widespread criticism, with the editorial board of the Chicago Tribune saying the use of COVID-19 as an excuse for the bailout is "beyond galling".
"Even by this state's low standards, asking federal taxpayers from California to North Carolina, from North Dakota to Texas - farmers, small business owners, teachers, nurses, bus drivers and bartenders - to help dig Illinois out of its pre-coronavirus, self-inflicted, financial hellhole is astonishingly brazen," the board wrote.
According to Wirepoints, any federal financial assistance should come with prerequisites focused on pension system reform.
"Defined contribution plans, cost of living reforms and increased retirement ages are all part of the reform suite the federal government should require. And for states that have constitutional protections, state lawmakers must commit to removing them or lose out on the aid," the report reads.
"Whether the federal government eventually provides direct aid to state and local governments remains to be seen. However, it's imperative that any such support not be used to bail out pensions or enable irresponsible states to further ignore their retirement crises."