Market hit to state pension obligations uncertain

Market hit to state pension obligations uncertain
Despite the significant drop in the stock market, it’s uncertain how that will affect the state’s ongoing obligations to its public pension systems. Photo: freepik.com

Despite the recent stock market drop due to the COVID-19 outbreak and response, it’s unclear what the financial implications will be for the future of the state public pension systems and ongoing unfunded liabilities. A clearer picture will be available at the end of June, when the State Actuary’s Office reassesses the public pension assets.

The State Pension Funding Council in September decided in a split vote that it would not lower the assumed growth rate used to calculate the state’s contribution to the pensions from 7.5 percent to 7.4 percent, despite State Actuary Matt Smith’s recommendation. A pension plan for police officers and firefighters currently uses the 7.4 percent.

Since then, the Dow Jones has dropped from 26,900 to 24,000, while the S&P 500 has decreased from 2,976 to 2,867 in the same timeframe. However, Deputy State Actuary Lisa Won told Lens they rely on actuarial values rather than market values for calculating growth and total state obligations to a pension plan.

“What’s happening today in the market doesn’t mean that’s going to be the position of June 30,” she added. “That’s the piece that we’re going to be looking at.”

Another reason for the uncertainty is that the Washington State Investment Board (WSIB) portfolio may not align directly with the market, Won said. “What’s happening in the market doesn’t mean that’s what happening to the investments. It might have a similar reaction but maybe not as large.”

The latest actuarial data from a June 2018 valuation shows $11.2 billion in unfunded liabilities. Although a negative impact may lower the asset values, it doesn’t necessarily mean that the state’s unfunded liabilities or contribution rates to those plans will go up. That would happen if the state Pension Funding Council voted to lower the assumed rate of return.

However, Won notes that the assumed rate is based on a 30-year average, which means some years will be lower or higher than that; for the past five years, the rate has been around 7.85 percent, whereas the 20-year average is 7.1 percent.

Although the Actuary’s Office assumed a 7.5 percent rate of return for this year, Won added that some investment gains not yet recognized on the books will “help offset potential large loss. We’re coming off a 10-year period of positive returns since the Great Recession, which means our plans’ contribution rates were expected to decrease in the future because we’ve been building excess assets. That helps lessen the impact of potentially a bad market return.”

Although Washington state’s public pensions are among the most well-funded in the nation,  Reason Foundation Senior Policy Analyst Marc Joffe advocates for “more conservative forecasting and investing” with public pensions. Private pensions are required to use a “risk-free” rate of return equal to that of U.S. Treasury bonds. The latest Treasury Bond issued has a 1.7 percent 30-year return.

The State Actuary’s Office will review actuarial gains or losses on June 30.

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