As reported in the WSJ, “two credit-ratings firms on Tuesday downgraded the city of Hartford further into junk status, citing an increased likelihood of default as early as November. S&P Global Ratings knocked down Hartford’s rating by four notches to CC. Moody’s Investors Service lowered its rating for Connecticut’s capital city by two notches to Caa3.”
The myth that public pension plans are perpetual has lead to misguided management and decisions. As we discussed earlier this year, just because something is perceived to be perpetual doesn’t mean it is sustainable. We are beginning to get frequent reminders of this fact, and Hartford, CT is just the latest example. Can cities and states truly continue to support contribution rates that are escalating unabated?
We (KCS) are huge proponents of defined benefit plans, but they need another path before most are shuttered. Stop focusing on the ROA as the primary objective despite the fact that GASB allows plan liabilities to be discounted at that rate. The use of the ROA as the discount rate has lead to the habitual underfunding of these plans. Had the true annual required contribution been made, these plans would be in much better shape.
In addition, so much energy is wasted in the day-to-day management of these plans by debating insignificant factors, such as active versus passive, ESG/SRI, minor asset allocation shifts, etc. These plans are failing because they haven’t focused on the true objective, and they will continue to fail until plans begin to focus on their specific liabilities first and foremost to drive asset allocation and investment structure decisions.