COVID-19 to Worsen Local Pension Debts
Most American families with an investment portfolio are facing additional anxiety as the markets have significantly dipped due to the COVID-19 crisis. I personally do not want to even look, but in the midst of this crisis, I hope state and city officials with pension oversight have investment returns on their immediate radar.
Generally speaking, Nebraska’s state pension systems have historically been in pretty good shape in comparison to other states across the country. The systems are fully funded and have been responsibly managed. That is not the case for every pension system in the state, however. Unfunded liabilities for Omaha’s police and fire pension system and the Omaha Public Schools are both more than $700 million.
Both of these systems do not have the assets to cover their projected pension payouts, and regardless of the Nebraska political subdivision, all pension systems are dependent on a certain assumed rate of return to keep up with their pension liabilities.
Usually, that planned rate of return is higher than market averages.
The financial health of Nebraska public pensions depends crucially upon the interest rate that can be earned on the funds’ investments. Yet, due to pension accounting standards that literally ignore investment risk, most policymakers and members of the public are unaware of how sharply pension financing hinges upon the 7.5 to 8% rate of return that most plans assume going forward.
For each percentage point decline in the assumed return, pension liabilities and the annual contributions necessary to fund them rise by around 20%, according to a past Platte Institute study by Dr. Andrew Biggs. This is a staggering difference.
We all hope that the market eventually returns to historic levels, but with an all but certain recession around the corner in the near-term due to the COVID-19 crisis, unhealthy pension systems will see an even larger unfunded liability putting more pressure on taxpayers to provide additional contributions. Healthy pension systems will also be affected if the market does not come back quickly or returns fall short of the planned 7 or 8%.
Nebraska’s local pension problems have often been swept under the rug as a non-issue, until it becomes too late and painful decisions have to be made. Officials and taxpayers cannot afford to be blindsided this time.
Photo by Raymond Bucko, SJ