There’s a dark cloud falling over the country’s roughly 6,000 state and local employee pension funds. After several years of feeling financially fat and sassy, the tanking stock market is once again placing some, and perhaps the majority, of these plans in financial peril.
We’ve seen this movie before. It happens when the country—and the stock and bond markets—hit the financial skids.
Heather Gillers, who covers state and local pensions for the Wall Street Journal, wrote about public pension funds’ over-reliance on the market last March. “Public pension funds had a median 61% of their assets in stocks as of Dec. 31, up from 54% 10 years ago, according to Wilshire Trust Universe Comparison Service.”
On May 10 she wrote about the growing losses: “Losses across both stock and bond markets delivered a double blow to the funds that manage more than $4.5 trillion in retirement savings for America’s teachers, firefighters and other public workers. These retirement plans returned a median minus 4.01% in the first quarter, according to data from the Wilshire Trust Universe Comparison Service expected to be released Tuesday.” [Emphasis added]
For example, North Carolina’s pension lost $4.6 billion in the first quarter.
State and local pension funds typically set a target return of about 7 percent. When they miss that target, public employees or their government employers are supposed to make up the difference so the plan is actuarily sound.
But an economic downturn usually means less tax revenue for state or local governments. So the struggling government entities often postpone making their contributions, which exacerbates the underfunding problem.
In worse case scenarios, affected public employees begin lobbying the state or local government to step in and use taxpayer money to make the fund whole.
A better solution to this dilemma is to transition away from public employee defined benefit pension plans to defined contribution plans—owned and (at least partly) controlled by the individual.
As one example, IPI has frequently pointed to three Texas counties—Galveston, Brazoria and Matagorda—that transitioned their county employees to a private sector option called the Alternate Plan. That plan has been functioning for 40 years, and employees have never lost a dime. Thus the counties don’t have to worry that a stock market downturn threatens their employees’ and retires’ financial future.
Most of those 6,000 state and local public pension plans could make the switch to an Alternate Plan. State and local public employees should demand their employers at least explore that option.
May 24, 2022