We’ve been speculating for a while that the economic impact from Covid-19 was going to be harsh for both states and municipalities, especially as it relates to upping annual contributions to public pension systems. Just how bad the hit is going to be is starting to become public. The National Conference of State Legislators (NCSL) has on their website a very interesting (and scary) map of just how bad the carnage is likely to be.

For instance, states known for their poor pension funding such as Illinois, New Jersey, Connecticut, and Kentucky, are projecting revenue hits in 2021 that will exceed 10% in the case of CT and IL, while NJ and KY are forecasting >15% hits to their top line. It is highly unlikely that any of these states that might have been planning to enhance their annual contributions this year or next will be able to achieve that objective. In fact, it is likely that cuts should be anticipated.

New Jersey’s legislature has just passed a bill raising state income taxes on those residents earning income in excess of $1 million / year, but that additional tax revenue, if collected, is not likely to make up for a projected 18% hit to revenue in 2021. With equity markets at near all-time highs and interest rates at all-time lows, cobbling together an asset allocation that can produce a return commensurate with the return on asset (ROA) objective will be challenging.

There are strategies that might help bridge these uncertain economic times, but it will force plan sponsors and city/state officials to think outside the box and perhaps re-tool the implementation of strategies that might have been tried in the past with less than stellar results.