The State Actuary’s Office plans to review the public pension system’s actuarial gains or losses at the end of the month. However, there are already a few certainties related to the effects of the COVID-19 shutdown and long-term policy decisions that state lawmakers will have to make regarding contributions.
One of those is that the economic recession’s full effects will not appear until the 2023-25 biennium. The Actuary’s Office has yet to account for the $4.4 billion in deferred asset value gains made since the Great Recession and before the COVID-19 shutdown, which represents 4.4 percent of total assets managed by the Washington State Investment Board (WSIB).
“We have some time, is another way of summarizing it,” State Actuary Matt Smith told the Select Committee on Pension Policy at its June 16 meeting. “We’re not going to treat the future losses that might come any differently than the gains that preceded it.” He added that the agency’s actuarial forecasting actually anticipated a drop in asset growth.
However, legislators eventually will need to decide whether to address any shortfalls in the system now – or wait until later. While paying for it sooner may be difficult in part due to the state’s expected operating budget revenue shortfall, Smith said that waiting could lead to even higher overall costs. He added that in the best-case scenario, the additional investment could be relatively small if the recession doesn’t last long. “(It would) lead to manageable increases in future costs at a modest short-term decline in the overall health in our systems,” he said.
The worst-case scenario is a “cycle of funding shortfalls…that we do not want to enter,” he added. “It’s something we’re going to need to watch carefully if this is a policy option that is necessary.”
WSIB Executive Director Theresa Whitmarsh told the committee that recent events have made it hard to do risk assessment for the pension investments. “We’re a global investor and we assess risk globally. One of the things we always assess is political risk…but it has become even more difficult to assess now.”
She added that determining the effects of COVID-19 on a global scale are also challenging because countries have adopted different policies in response. “That’s impossible to figure out – how to build out into a risk assessment.”
Yet she said in the long-term: “we’re optimistic. We’ll weather this; recovery will come. But how and when that will occur remains a huge unknown.”
The State Actuary’s Office will review actuarial gains or losses on June 30.