“If you look at states as the ‘makers and takers,’ Kentucky is a state that gets more federal funds and public assistance than it collects,” says R. Paul Herman, the founder of HIP Investor, a San Francisco-based municipal bond ratings, data and analytics provider. “Kentucky is also a state that doesn’t issue its financials on time, and it has far fewer businesses than a state such as New Jersey, so less new tax prospects. Younger employees may want to think about getting their money out of the system and reinvesting, if they can.”

With states’ revenues so dramatically slashed, Herman also expects more states’ municipal bond issues to request extensions for paying the interest and principal on their bonds. “If investors don’t permit extensions or renegotiated time lines, stressed state muni issuers may file for bankruptcy, leading defaults higher than experienced in the past 50 years,” he says.

Some 730 miles away in New Jersey, where public pensions were underwater by some $142 billion and funding was at 35.9% before the Covid-19 crisis, S&P Global Ratings gave the state a negative outlook in April, warning New Jersey could cut its pension contributions to deal with revenue losses. While the state has been creative in the past in finding pension funding sources—using its lottery to fund $1 billion in pension contributions annually—that was before the crisis. S&P analysts warned that lottery ticket sales were down 12% through March.

“We build this into our conversations early with public pension clients,” says Andrew Chan, a partner at Locker Financial, which has offices in Framingham, Mass., and Little Falls, N.J. “We ask: What if the New Jersey public pension plans were to implode in 2023?

“We have quite a few clients that actually are state workers whether they’re teachers or work in another capacity,” Chan adds. “New Jersey has historically … done a good job of making its contributions, but the downgrade has everyone concerned.”

In addition to learning the ins and outs of each client’s public pension plan—New Jersey has seven of them—Chan runs a variety of scenarios showing clients what their retirement income will look like if their public pension payouts are slashed at a variety of levels or if the stock market tanks. “We tend to look at it in [a] better-case or worst-case scenario and run projections that way,” Chan says. “I think that tends to help clients prepare mentally.” The firm shows clients what would happen if the pension were cut to 95% or even to 70% of what was expected. In the best-case scenario, “they get all this money. In the worst-case scenario, pension payments are cut and the stock market tanks.”

He helps clients uncomfortable with the prospect of a diminished pension payment to invest more now in the most logical vehicles for them, including both tax-deferred and taxable accounts. He also has frank discussions with clients about working longer and cutting expenses to free up more capital.

“We are specific. We say: ‘What if you worked an additional three to five years, didn’t move, needed to downsize? What if your spouse worked longer, or you moved out of New Jersey to save on taxes?’” These are all fair questions in preparing investors for possible doomsday realities, he says.

“We actually had a client who is with a private company who decided to take a lump sum,” Chan says. “The analogy is the same. If you don’t have faith in your employer or their ability to pay your pension going forward, you need to take action. We haven’t had any public employees reach that age yet.”

Diahann Lassus, president and CIO of Lassus Wherley, a subsidiary of Peapack-Gladstone Bank in New Providence, N.J., says she also asks clients with public pensions point-blank what they will do if their pensions are reduced by as much as 30%. “That’s the starting point,” Lassus says, “focusing on where you are and figuring out how you can redirect any income and assets you have to building retirement income.

“So if you can save $200 or $2,000 a month more, then over the long term it will provide a high benefit for you. If you get 10 years down the road and your pension is still intact, great, but if it isn’t, then at least you’re in the position to offset some of that loss.”           

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