US public pension plan sponsors and administrators are likely entering a period of fiscal stress, and rising pension obligations caused by the sudden pandemic-induced recession are expected to be felt for years by US state and local governments, according to a report from S&P Global Ratings.

S&P said US public pension funds in aggregate lost approximately $850 billion during the first quarter of the year, and that they would need to rebound sharply during the second quarter to maintain the average funded ratio from a year ago.

“In the public sector, market returns are built into the funding model and thus make up a large part of pension plan inflows,” the report said. “Should market returns remain below past peaks, the effect of poor returns will result in an increase in employer contributions.”

The report looks at how the recession is likely to impact public pensions during three periods—immediately, over the near-to-mid-term, and over the long term.

The immediate concern for US public pensions is their liquidity position, according to the report, as a pension plan’s liquidity position mitigates near-term shocks. Pension asset portfolios without enough cash to cover benefits could be forced to sell return-seeking assets at inopportune times.

A pension plan’s liquidity-to-assets ratio can help determine how much liquidity risk it is carrying. A plan with a negative liquidity-to-assets ratio needs additional money to maintain operations and make benefit payments. And the further below zero the ratio is, the more assets that may have to be converted to cash.

During the near-to-mid-term, a plan’s funded level indicates the range of impact the recession will have. “Many public sector pension plans measure their assets in June and are recognized on employer financial statements the following year,” the report said. “Though markets have seen some gains in April, funded ratios are likely to decline in the near future.”

According to estimates from the Federal Reserve, US public sector pension assets were $4.8 trillion as of the end of last year and were allocated between market risk-mitigating investments—such as cash, fixed costs, and hedge funds—and return-seeking investments, which includes all other investments.

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