Municipal pension debt is among the many aspects of the economy that have been severely impacted by the coronavirus pandemic. COVID-19 not only exposes, but also further threatens the already-weak fiscal health of municipal retirement plans.

Inaction on this front could mean insolvent pension plans dragging some of the nation’s largest cities into bankruptcy. After all, when the stock market takes a hit, so do pensions. This is because most of the typical pension funds’ income is from returns on assets that are invested (from employer and employee contributions) in financial markets.

The stock markets’ downward spiral surely won’t help state and local pension plans that, even before the outbreak, only had 73 cents per dollar owed to their retirees. Now, with credit-ratings firm Moody’s MCO, +0.07% and others projecting significant losses for their portfolios, the already dire situation is only going to get worse. As it stands, most public sector workers (like teachers and firefighters) have a pension plan. When investment returns fall short of their set target, government units must fund the difference.

When the economy comes to a grinding halt, as it did in March, the usual — and failed — strategy of issuing bonded debt or raising taxes to bridge the gap starts to break down. The shutdown of the economy will lead to dramatically lower tax revenues for cities. This will make fully funding public services difficult, let alone making up for the unrealized expected pension gains.

The other revenue-generating alternative is issuing bonds. However, it usually covers long-lived infrastructure and capital investments. Before the pandemic, interest rates were low, so cities could borrow cheaply. However, when the outbreak worsened, investors started withdrawing funds, making it harder for those municipalities to borrow. Thus, municipalities have quickly found themselves in a situation where they are simultaneously facing plummeting investment returns, lower tax revenue and an inability to borrow. As a result, they will have little-to-no resources to help pension funds in crisis.

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