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Chesto Means Business

State pension fund takes a hit, but credit ratings could be the real concern

Borrowing costs could go up if state officials divert money to more urgent causes

Charlie Baker stood at the podium at the State House on Friday.Blake Nissen/The Boston Globe

Michael Trotsky’s phone rings often these days, and it’s easy to understand why. As the top executive overseeing the state’s pension fund, he keeps fielding calls from state and local officials. They see the stock market headlines, and wonder what they mean for the retirement savings for nearly 300,000 public employees and retirees.

His takeaway, in a nutshell: Relax. Payouts to retirees are not in jeopardy, and the pension fund has bounced back from far steeper market declines.

That’s not to say there aren’t risks — but they would be to the state government’s credit ratings, not to retiree benefits. The big question is this: Will the ratings get hurt, and borrowing costs go up, if the coronavirus pandemic slows the state’s progress paying down its massive pension liabilities, totaling more than $40 billion?


First, let’s look at the numbers to get an idea of how the Wall Street bloodbath — the Standard & Poor’s 500 index is down nearly 22 percent this year through Friday — affects the state’s pension fund.

The Pension Reserves Investment Trust fund held $79 billion as of Dec. 31, the most recent tally. Much of the pension fund is repriced on a quarterly basis. So we won’t know how far things have fallen for another few weeks. However, Trotsky said 60 percent of the fund gets repriced daily — namely, the money in publicly traded stocks and bonds. And that portion has shed some 15 percent of its value this year through Thursday, a $7 billion-plus decline. (The rest is in everything from hedge funds to timberland to real estate.)

Trotsky points out that there’s more than enough of a cushion to cover annual payouts to retirees; last year, those cost $1.3 billion. His team has been deliberately paring back the stock investments in the past five years; just under 40 percent of the fund is in public equities today, compared to 50 percent five years ago. He points out that the S&P 500 lost half its value after the dot-com bust and then again during the Great Recession. This decline is nowhere near as bad — yet.


Heath Fahle, policy director at the business-backed Massachusetts Taxpayers Foundation, said a prolonged market slump could make it tougher for the state to reach its goal of fully funding its pension obligations by 2037. If the state falls short, bond rating agencies such as S&P and Moody’s will pay attention.

To nudge the state along, the Legislature and the Baker administration recently agreed to sock away $3.1 billion from the state budget in the next fiscal year. That’s a nearly 10 percent increase from what the state committed for this fiscal year toward its pension obligations. Fahle can envision a scenario in which state leaders change their minds and decide not to increase the payment because of the pandemic, to attend to more urgent needs. The downside: Falling behind could end up hurting the state’s credit grades, potentially resulting in higher borrowing costs.

Greg Sullivan, research director at the Pioneer Institute think tank in Boston, sees a more drastic scenario: State lawmakers might divert a large part of that $3.1 billion, as tax revenues of all forms crater amid this broad economic shutdown. And Sullivan worries about a run on the state’s unemployment insurance fund. Sullivan doubts the $2.7 billion promised to Massachusetts from the rescue bill approved in Washington this week will be enough to offset these strains on the budget.


At least we’re not alone. Greg Mennis, director of public sector retirement systems for Pew Charitable Trusts, said most state pension funds are already down in the 10- to 15-percent range in this fiscal year, Massachusetts among them. The unfunded pension liability is higher in Massachusetts than in most states, he said, although not at a crisis level. Bond rating agencies generally penalize states that fall short of pension-funding goals, he said, but it’s hard to know what they’ll do given these unprecedented circumstances.

Mennis said he expects state officials across the country will be carefully reviewing their planned increases in pension commitments, given the uncertainties around tax revenue.

The Massachusetts pension fund, essentially a collection of state and local retirement funds, will recover eventually from this stock-market correction.

Like any good long-term investor, Trotsky knows the market will bounce back, eventually.

The state budget? That’s another question entirely.

Jon Chesto can be reached at jon.chesto@globe.com. Follow him on Twitter @jonchesto.