Public Pension Losses Last Quarter Compound Funding Challenges

(Bloomberg) -- The stock market swoon in the fourth quarter of 2018 is threatening to compound the mountain of unfunded pension liabilities confronting U.S. states and local governments.

The median government employee pension, whose assets are heavily weighted toward U.S. stocks, lost 7.5 percent in the fourth quarter, according to data released Wednesday by the Wilshire Trust Universe Comparison Service. Public pensions have lost 4.9 percent since the beginning of the fiscal year on July 1.

“Equity exposure weighed on plan performance in the fourth quarter as geopolitical concerns, earnings revisions, and higher interest rates led to a deterioration in investor sentiment," said Jason Schwarz, president of Wilshire Analytics and Wilshire Funds Management in a news release.

The stock market volatility is raising questions about how state and local pensions can manage through market turmoil, aging populations and rising fixed costs for retiree health-care. The median public pension has more than 40 percent of assets allocated to U.S. stocks and 13.5 percent targeted to international equities.

The combined shortfall for state and local pensions exceeds $2 trillion, and if the funds’ fail to meet investment targets that average about 7.5 percent governments will need to make up the difference with higher payments, or cuts to services, to keep from losing ground. A 10 percent investment loss would raise costs for the funds’ to "tread water" by around 35 percent in fiscal 2020, according to Moody’s Investors Service.

In some cases the losses suffered by U.S. public pensions have yet to be amortized, meaning those losses still contribute to higher costs today, Moody’s said in a report Tuesday.

“Additional investment losses would compound pension cost challenges, underscoring the importance of pension investment returns for state and local governments’ operating budgets," Moody’s said.

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