The WSJ is reporting in today’s edition that public pension plans suffered a -13.2% average return for the quarter ending March 31, 2020. This information was obtained from the Wilshire Trust Universe Comparison Service (TUCS) data. The first quarter return eclipsed 2008’s fourth quarter as the worst on record in the 40-years that the TUCS universe has been reported. This shouldn’t be surprising, but it may actually be an understated return, as alternative investments in private equity, real estate, infrastructure, etc. often come with a one-quarter lag. Oh, boy!
We’ve been anticipating that the first quarter was devastating for the funded status of public pension plans, as well as those in the private sector – both corporate and multiemployer plans. The hit to plan asset bases was somewhat soothed by April’s strong market returns, but not nearly enough to maintain contribution levels. Unfortunately, state and municipal governments are also being harmed by significant reductions in revenues as the economy slowly reopens. The ability to meet increased funding requirements may not be possible in this environment.
We are huge fans of DB plans and they must be preserved, but states such as NJ, IL, KY, CT, etc. cannot overcome their significant negative cash flow requirements through “better” investment returns. The only way to make up for this shortfall, without further burdening their tax base, is to have the Federal government provide low-interest rate loans to these struggling plans. The proceeds from the loans must be used to defease the retired lives liability out 10-15 years, so that the residual assets now have time to grow unencumbered. The extending of the investment horizon (buying time) will allow for a more aggressive risk profile since these assets are no longer a source of liquidity.
While the loan is outstanding, states and municipalities would be forced to make the annual required contribution, something that NJ hasn’t done since Washington slept there. They would also have to maintain current benefit levels. If this sounds familiar, this strategy is contemplated in the legislation that passed the House of Representatives last July (H.R. 397 – the Butch Lewis Act).