We’ve just passed an annual day of reckoning in public finance: Most states and many local governments close their books for the fiscal year on June 30, and public pension funds typically report their quarterly portfolio balances shortly thereafter. With the Senate still dithering over federal stimulus aid to state and local governments, after its majority leader suggested that state bankruptcies would be a better solution and that it’s all the fault of public pensions, it’s time to reality-check the pension scoreboards.

The COVID-19 pandemic has crushed the world economy, yet global stock markets have recovered much of their March sell-off. For pension funds, stock portfolios are trading close to the levels of 12 months ago. In their actuarial calculations, most public pension plans use a rolling average of three or five years for investment returns, and my expectation is that most plans will meet those “smoothed” actuarial assumptions even if returns in the last 12 months were flat. Average funding ratios of public pension funds have stabilized since 2016, while many systems have prudently reduced their actuarial return assumptions, which would otherwise depress those ratios had investments disappointed.

Longer-term, however, public pension funds will still have to confront head-on the reality that in the coming decade or two their diversified portfolio investments seem highly unlikely to produce real rates of return (net after inflation) that meet their assumptions. Bond yields remain suppressed, so their market prices are likely to decline over time. There is clearly a risk that inflation will outrun bond returns over the next two decades, especially if mounting federal deficits and debt propel interest rates higher. Stock markets will face a long-term net-profits markdown if and whenever corporate tax rates are increased by a future Congress seeking to balance federal budgets. Heavier debt loads and the global superabundance of investment capital chasing available economic growth will overhang common stock returns.

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