Special Briefing: Public Pensions - Still a Crisis?

“A Manageable Challenge”: Municipal Government, Public Finance, and Economic Experts Discuss Ongoing Pension Burden For State And Local Governments

Panelists Discussed Unfunded Liabilities for Public Employee Pension Benefits and Their Effects in Latest Volcker Alliance/Penn IUR Briefing

“We have a target of approximately 30% of the [pension] portfolio to alternative asset classes,” said Shoaib Khan, Director of the New Jersey Treasury Division of Investment. “Those targets over the last several years have been increasing, and I think you’ve seen that across several pension plans as well, and it seems to be a trend and a movement towards diversifying portfolios with the inclusion of the various alternative asset classes that are rising.”

“Our top assessment from a 50 state review of data is that funding strategies for public plans have significantly improved whether we look at the last five years or the last 15 years,” said Anthony Randazzo, Executive Director of Equable Institute. “However, the net effect of those strategies has mainly been to prevent, say, a potential funding crisis from developing or getting worse, depending on your point of view. It hasn't significantly moved the needle on funded status, whether we're looking at the national average of funded ratios or unfunded liability levels… The major reasons we think, are related to how the sources of unfunded liabilities are changing and what are the major contributors to what you might notionally call pension debt today. ”

“As far as pension funding is concerned, we have seen a tremendous improvement in ratios since the pandemic,” said Vedanta Goenka, Senior Municipal Strategist, Citigroup. “This improvement has occurred on the back of strong investment returns as well as judicious use of the federal pandemic aid by state and local governments. States like Illinois, New Jersey, and Kentucky that suffer from the worst funded pension programs have seen maximum improvement, and they've benefited not only from these investment returns, but they've also implemented policies that address some of the challenges.”

“The adjustments that state and local governments have made to their pension systems in response to pension system concerns, such as adjusting benefits, supplemental funding, and ensuring contributions are meeting their requirements, has demonstrated a commitment to take actions to ensure the sustainability of pension systems,” said Merl Hackbart, Professor Emeritus, University of Kentucky Martin School of Public Policy and Administration. “Given that demonstrated commitment, it is probably an overstatement to characterize the pension system status currently as being in crisis. Rather, ensuring the viability and sustainability of public pension systems may be best characterized as being a manageable challenge.”

“In answer to the question, ‘Are pensions still in crisis?’ The answer for us is, ‘well, it depends,’” said Les Richmond, Vice President and Actuary, Build America Mutual. “You know, there are some employers, state, local governments that can afford to pay higher pension costs. And we look at those factors; how does this all relate to their overall finances? And can employers pay for these costs? So, you might have neighboring towns that have very similar pension profiles — one is carrying a high amount of debt, one is carrying a little amount of debt — I would say the one with a little amount of debt is in much better shape. So it calls for granular analysis [if] we're going to answer the question if pensions are still in crisis.”

“In a lot of places, [pensions are] still very much an issue, but in terms of the national conversation, pensions have definitely taken a step back. I will note, though, that there are a couple of upcoming things that could add pressure; some of them have already been mentioned regarding the asset investments in alternative assets, that makes pension assets overall more volatile. The stock market itself has been more volatile over the last decade or so. So all of those things are intertwined,” said Liz Farmer, public finance journalist and co-host of the Public Money podcast. “And while that institutional memory of the Great Recession is still very much there in state legislatures, lawmakers have learned their lessons about what not to do with pensions and what not to do with one-time money as well … It's going to be a temptation I expect in the next year or so with regards to [how] those pension payments are eating up some of the annual operating budgets, and as lawmakers are looking to make cuts, it’s always an option.”