Public plans to face major losses in fiscal 2020 – Moody's

U.S. public pension plans are facing investment losses approaching $1 trillion because of the economic fallout from the coronavirus, according to a report from Moody's Investors Service.

The losses could exacerbate the pension liability challenges that many state and local governments are already facing. Plus, the economic setback is reducing revenue levels and threatening the ability of municipal governments to afford these higher pension costs.

U.S. public plans are generally on pace for an average investment loss of about 21% for the fiscal year ending June 30, Moody's estimates.

"Without a dramatic bounce back of investment markets, 2020 pension investment losses will mark a significant turning point where the downside exposure of some state and local governments' credit quality to pension risk comes to fruition because of already heightened liabilities and lower capacity to defer costs," said Tom Aaron, vice president at Moody's, in a news release announcing the report.

"The credit impact from 2020 pension investment losses will depend on many factors, including the ultimate magnitude of asset declines, the unique funding and cash flow position of governments' pension systems, and their ability to absorb cost hikes in their budgets while continuing to provide services and pay debt service," Mr. Aaron added.

Reflecting an annual investment return target in the range of 6% to 7.5%, plan assets are heavily allocated to equities and alternatives.

Falling market interest rates are also increasing adjusted net pension liabilities. On average, adjusted net pension liabilities are generally on pace to rise by nearly 50%. Investment losses are pushing down the value of pension assets and falling interest rates are pushing up adjusted net pension liabilities further by causing the market value of total pension liabilities to rise, the report said.

If steep investment losses are not reverse, the annual costs that governments face to keep up with their unfunded liabilities will spike, the report stated. The cost for governments to make the minimum contributions required to prevent unfunded liabilities from growing is likely to rise nearly 60% in fiscal 2021. If governments' revenue performance also deteriorates, then pension affordability ratios will get significantly worse for some plans due to the combination of increased costs and decreased revenue.

Moody's based its estimates on a sample of 56 large U.S. public pension plans.