Ever Closer to Midnight: The Market Boom and State Pensions

For some of my earlier posts about the timebomb of unfunded pension liabilities go here, here or here. For my published article, Municipal Bankruptcy: When Doing Less Is Doing Best, go here or here.

One might think that the nearly decade-long runup in the stock market has closed the funding gap for state employee pensions. But one would be wrong. Go here to read an excellent piece "Pension Tick-Tock" where Steven Malanga explains that even though since 2009 the stock market has produced an annual compounded return of nearly 15%, state pensions are in more parlous condition that they were before the Great Recession:

 A recent Wilshire Consulting report estimates that at the end of fiscal 2017, state government pensions nationwide were only 70 percent funded, down from 87 percent in 2007. Since the recovery began in 2009, $100 placed in a broad market-index fund would have yielded an investor about $365 today—an average compound annual gain of some 15 percent. No matter for pensions, though: thanks to a host of problems, most state and local government funds have spent a good part of the nine-year recovery heading in the wrong direction. (Emphasis added.)

The large group of Baby-Boomers approaching retirement is a big part of the problem. Coupled with declining birth rates, many states have fewer high-income taxpayers to support a growing number of retirees. Moreover, "pension plans have also miscalculated the impact that volatile swings in the market have on their ability to recover." In other words, large draws at the bottom of the market have reduced the effect of subsequent market gains. Thus, even increased state contributions (up 90% since 2009) have failed to keep pace with faster-increasing unfunded liabilities.

What will happen with the next recession? I'd rather not say so I'll quote Malanga:

Only massive infusions of cash from taxpayers could help then, but state and local governments—already having upped their contributions to pensions—will be in no position to bail out funds with taxpayer dollars when the next recession hits.

Of course, the unwillingness of states to raise taxes sufficiently doesn't mean they can escape liability for retiree benefits. But, without recourse to state-level bankruptcy it remains to be seen what will happen when retiree class-action lawsuits hit the fan.