While revenues are down at a time when contributions need to be up, the pension obligation bond is another option that government sponsors of underfunded plans can use.
Girard Miller, a retired investment and public finance professional and former CIO of the $17.3 billion Orange County Employees Retirement System, Santa Ana, Calif., said that the pension obligation bond is a temporary measure that could put the underfunded pension plan "on firm footing."
"They only work well if they're issued in the depths of a recession. Now is the time for that," Mr. Miller said. "The plan sponsor has a liability with this, but they can stretch that out over 30 years if they need to." The cost of doing this is lower than the traditional way, so there is potential for some cost savings for the state.
But not everyone agrees.
"I don't think (pension obligation bonds are) an option in this market right now," Ms. Doyle said. "It's a risky endeavor because you're assuming the pension will outperform the interest rate of the bond, and that's a huge gamble."
Going forward, increased contributions alone will not keep struggling plans afloat.
"It will have to come down to structural reform," Karel Citroen, head of municipal research at Conning said. "I just don't see how you're going to address pension funding issues you see in this country without addressing the entitlement side of it."
Mr. Citroen pointed out that, if it's not possible to make such changes for current plan participants, structural changes should be put in place for new or future plan participants.
Mr. Citroen added that "it will probably come down to an escalation of this issue for one plan, like New Jersey or Illinois, for that mindset to be accepted by other constituents as well."
While Insight's Mr. McLaughlin said that underfunded plans will have to engage in "firefighting" to ensure they have enough cash on hand to pay their obligations in the short term, in the long term, plans will need to craft a "liquidity strategy that's more formal than they've had in the past."
"When the dust settles, you'll see plans making more fundamental changes to their investment strategies going forward," Mr. McLaughlin added.
NASRA's Mr. Brown said it's going to take a while before the long-term impact of all of this is known.
"One should remember that these losses and gains are phased in over several years," Mr. Brown said. "We won't know what the returns will be until the fiscal year ends, and so it's going to take a little while."