Colorado and South Carolina have pulled back from making additional payments to their underfunded pensions, moves that may play out in other states that are struggling to balance budgets as the coronavirus ravages tax revenue.
Q2 2020 hedge fund letters, conferences and more
Colorado eliminated a $225 million supplemental payment to the state’s Public Employees’ Retirement System, backing away from a 2018 plan to bolster the pension, which is about 60% funded after suffering from years of inadequate government contributions. South Carolina suspended a statutorily scheduled 1% employer contribution increase for the fiscal year beginning July 1.
And New Jersey, which has one of the nation’s worst-funded pensions, has deferred a $950 million pension payment until September and Governor Phil Murphy’s plan to increase contributions 13% to $4.6 billion is in question.
“There’s definitely going to be pressure in some places to not pay annual required contributions because of revenue shortfalls,” said Gene Kalwarski, the chief executive officer of Cheiron, an actuarial consulting firm. “States are going to have to make up the shortfall somehow, some way.”
States are projected to face budget shortfalls of about $555 billion through 2022, according to the Center on Budget and Policy Priorities, and without more aid from Washington they will have to cut spending or raise taxes. Postponing pension payments may ease budget pain in the short-run, but it will defer the costs to later years and allow unfunded liabilities, estimated at as much as $5 trillion by the Federal Reserve, to grow.
Unfunded obligations have kept rising despite steady investment gains
The pension contribution cuts are setbacks for states that enacted reforms in the aftermath of the Great Recession.
In 2018, Colorado passed legislation to raise employee and employer contributions and require an annual lump sum payment of $225 million to the pension. Colorado also capped future cost of living increases at 1.5% and raised the retirement age to 64.
In 2017, South Carolina increased scheduled employer contribution rates by 1% annually starting in fiscal 2019 until they reach slightly more than 21% by fiscal 2023. The pension, which in 54% funded, reduced the amortization period for its $23 billion shortfall to 20 years from 30 -- requiring it to pay off the debt faster -- and reduced the assumed rate of return to 7.25% from 7.5%.
Read the full article here by Martin Braun, Advisor Perspectives
