Sharing is Caring!

No Gain, Lots of Pain. The stock market downturn portends big losses for government pension funds—and billions in new obligations for taxpayers.


The sharp decline in financial markets will likely result in a huge setback to government-employee pension funds, which never fully recovered from the last recession. Though the accounting of these systems is more complex than ordinary municipal budgets, and the implications of market drops can take time to become apparent, a picture is emerging of the costs that some of the biggest funds—like the California Public Employees’ Retirement System (CalPERS)—face. Meantime, the risks that some of our worst-funded state and city pension systems must now confront, including New Jersey’s and Chicago’s, are also becoming evident. Last week, the president of the Illinois State Senate even asked for a multibillion-dollar bailout of the state’s pension system. The failure of many pension funds to fix their funding during the last decade of market expansion will weigh heavily on taxpayers if the economy and financial markets don’t turn around rapidly.

With about $350 billion in assets—down from about $400 billion at the market’s height, earlier this year—CalPERS is the nation’s largest public-employee pension fund. It took a battering in the last recession, when its funding shrank from 87 percent of the money needed to meet future obligations in 2007 to just 68 percent a few years later. After an 11-year market expansion, though, CalPERS is barely more than 70 percent funded, as of last June. Taxpayers have paid the price. The state and its local governments funnel $15.6 billion into the fund, up from $6.4 billion in 2007.

CalPERS CEO Marcie Frost assures local officials that the system is prepared to weather this downturn, having reduced its exposure to volatile stocks. Nonetheless, the CalPERS rate of return for the first nine months of the current fiscal year, which ended on March 31, was negative 4 percent, compared with a projected annual gain of 7 percent, which is necessary to keep CalPERS from taking on more debt and forcing even higher payments from local governments. Officials estimated that even if the fund scratches its way back to a zero-percent return for the fiscal year that ends June 30, its funding status would slip to about 66 percent. Under the worst-case scenario—a 10 percent investment loss—the nation’s largest public-employee retirement system would have just 60 percent of the money on hand that it needs to meet future obligations.

Both scenarios would require more money from taxpayers. For public-safety workers who are part of CalPERS, local governments are already paying pension costs equal to 50 percent of every worker’s salary. Over five years, CalPERS says, that amount could increase to nearly 70 percent of salary cost. For every $1 in salary paid to a cop or firefighter, a jurisdiction would need to spend almost 70 cents more just on pension costs. California schools are paying the equivalent of 28 percent of salaries to fund pensions for employees who are part of CalPERS. If assets decline by 10 percent, governments would have to contribute 37 cents for every dollar of salary paid to school employees who are part of CalPERS—a one-third increase in pension costs over four years. No wonder, then, that Frost acknowledges “the affordability of [pension] plans has become ever more difficult” for the 3,000 local-government entities in the state that provide workers with pensions through CalPERS. Last week, school officials around the state asked Governor Gavin Newsom to delay scheduled pension increases.

The New York City Retirement System, composed of five pension plans with some $150 billion in assets, has also seen its burden to taxpayers soar in recent decades. Twenty years ago, the city was spending some $1.5 billion a year on pensions. Costs rose to $10 billion this year. Before the Covid-19 crisis, the city had projected that the steep increases might finally be over, thanks to more than a decade of robust investment returns; the market’s decline has upended those estimates.

“The cratering of the financial markets has undoubtedly affected the value of assets under the management of the New York City Retirement System (NYCERS)—the city’s five pension plans,” the New York City Independent Budget Office recently reported. The budget watchdog’s new analysis estimates that if the city’s pension fund records a zero-percent return for this year, the cost to taxpayers would be $107 million a year in higher pension payments, added every year to the city’s current pension costs, for the next 15 years. The numbers get even grimmer, however, if the losses mount up. The worst-case scenario—a 20 percent decline in assets, which would mirror the losses in 2008—would require the city to spend more than $400 million annually for the next 15 years in increasingly expensive pension payments. In just the next five years, that would add more than $2 billion cumulatively to the city’s retirement-funding requirements.



h/t JT


Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.