(Bloomberg Opinion) -- The coronavirus crisis is still unfolding, but it’s not too soon to think about lasting financial impact and how to limit the fallout. One major financial crisis that may hit later this year or early in 2021 is the ever-looming collapse in state and local employee pension funds. Although the problem has been growing for decades, the virus may have been the event that pushed it over the edge.Declines in the financial markets may have cost the funds as much as $1 trillion in assets, or about 25% of their total, according to Moody’s Investors Service. That would bring the aggregate funding ratio—value of assets divided by actuarial value of liabilities—from 52% based on the last report by the Census Bureau down to perhaps 37%. Markets may recover, of course, but they may not. The latest aggregate numbers we have are from 2017, and for most individual funds data is available only as of mid-2018. Asset returns are usually smoothed so it could be four or five years until the full effect of the virus is reported officially.But it’s not aggregate numbers or official reports that will trigger a crisis. It’s the big funds in the worst shape. My back-of-the-envelope calculations suggest Connecticut could be looking at a 28% funded percentage if the numbers were available now, Kentucky 25%, New Jersey 24% and Illinois 20%.Those figures rely on optimistic assumptions about healthcare cost increases and discount rates; the true numbers are probably worse. The important statistic is more objective: how many years’ benefits do the pension assets represent? That could be no more than about four years in Illinois if true numbers were public today, five in New Jersey and Kentucky, six in Connecticut.All benefits for active employees, plus all benefits for everyone in the near future, will have to come from employee or state contributions. But states will be strapped for cash, and looking to cut contributions, not raise them. Employees will be unwilling to contribute more since there’s little likelihood they’ll ever see that money again, especially as post-2008 reforms have denied many of them the gold-plated benefits that employees with more seniority enjoy. Taxpayers? The least willing of the bunch. Creditors? The states need to keep borrowing money, so they have to appease creditors. Some of the money will come via defaults or restructuring of state and local debts, but this is its own crisis, and it won’t fill the gap. The federal government? Maybe, but not for full payments. A more likely scenario would be absorbing retirees into Social Security and Medicare at sharply reduced benefit levels—and those programs face similar problems as state and local plans.It’s true that 48 states have constitutional or other legal protections for pension benefits. These will improve union bargaining power, but it won’t squeeze anywhere near the full amounts promised. Courts will both unwilling and unable to force governments to hand over money the governments don’t have and can’t get.Will deaths tied to the Covid-19 pandemic save the day? After all, deaths will likely be concentrated among retired employees getting benefits rather than active employees paying contributions. Moreover, active employees who succumb to the virus will be replaced. If we exclude Hollywood disaster scenarios, the highest projections are U.S. death rates doubling in 2020 and remaining 2.5% higher thereafter. Using the age distribution of coronavirus deaths for which information is available, that could cause liabilities to fall by about half the amount that assets fell. But in that scenario assets would probably fall much farther. It’s hard to come up with a scenario in which additional coronavirus deaths improve pension funded ratios.Will these events trigger Illinois or some other state to default? It’s plausible. Will that cause other states and municipalities to follow? That’s likely, mainly because creditors will stop lending to states with big unfunded pension liabilities. Will that provide the cover for every state except maybe Utah and Wisconsin from seizing the opportunity to renege on promises? I’d bet on that as well.What we do today is start treating pensions as an issue that must be addressed rather than a can to be kicked down the road. Admit that promises to employees will not be kept, and start figuring out how to direct the cuts to where they will do the least harm: younger workers with more time to prepare and richer workers with more ability to pay. Collecting the maximum contributions possible, but in realistic forms employees can count on rather than unreliable promises about future. Releasing timely and complete data on assets and cash flows.The basic terms of the fix are obvious. Pension payments will be capped, probably at something like the Social Security maximum of $3,011 per month for someone who retires at age 65. Tax the benefits, again probably like the rules for Social Security (50% of benefits for single filers with total income between $25,000 and $34,000, 85% of benefits for higher income individuals). Make healthcare plans more Medicare-like, with lower provider payments. Employee contributions to be directed either to Social Security/Medicare or individual retirement accounts rather than underwriting payments to retired workers.This will provoke fierce fights. First to accept the inevitable and second to set the precise terms. How will police officers be treated versus teachers versus Division of Motor Vehicle clerks? Will all state and local plans be put in one bucket, or will employees from more prudent states do better than employees from profligate ones? How will scarce funds be directed to pensions versus health benefits? How much will taxpayers and creditors kick in? These fights will take place in legislatures, courtrooms and union elections. It won’t be pretty or fun. But the sooner we admit the problem and start to solve it, the sooner it’s behind us.This column does not necessarily reflect the opinion of Bloomberg LP and its owners.Aaron Brown is a former managing director and head of financial market research at AQR Capital Management. He is the author of "The Poker Face of Wall Street." He may have a stake in the areas he writes about.For more articles like this, please visit us at bloomberg.com/opinionSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
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California had 9,816 confirmed coronavirus cases, and 212 deaths, as of Thursday morning, according to the New York Times tracking service. In Los Angeles County, the total confirmed cases have totaled 3,518, according to the county’s Department of Public Health, while the number of deaths has reached 65.But public health experts wonder why the state — which recorded its first case of the novel coronavirus on Jan. 26 — has not seen as big a surge as hot spots like New York, which has reported 83,889 confirmed cases and 1,941 deaths as of Thursday — with 1,374 in New York City alone.California’s strict and early shutdowns of nonessential businesses and orders for residents to stay at home may have helped the state avoid an outbreak as severe as New York’s, but health experts told TheWrap that the worst is yet to come in California, and that big cities like Los Angeles still need to prepare for a potential onslaught of seriously ill patients in hospitals.“I want people to recognize that we’re going to see some things we don’t want to see. We’re going to see a lot more people sick and a lot more people die,” John Swartzberg, an infectious diseases and vaccinology specialist at the UC Berkeley-UCSF Joint Medical Program, told TheWrap. “That’s going to happen no matter what we can do.”California COVID-19 Cases, Johns Hopkins researchAlso Read: CNN's Chris Cuomo Announces He Tested Positive for CoronavirusAs has been extensively reported, the data surrounding the number of coronavirus cases in the U.S. is flawed and imprecise, largely because not enough people are being tested. As of March 31, the California Department of Public Health reported the completion of 31,038 tests, with another 59,100 pending. That’s significantly less than the 220,880 New Yorkers who had been tested as of March 31, according to New York State’s public health department.Further, comparisons between states are flawed because of differences in population and population density. But in terms of the curve of infection, California appears to have made positive strides in reducing the severity of the outbreak, even though the numbers of cases and deaths have continued to increase significantly each day.“We are in a completely different place than the state of New York, and I hope we continue to be, but we won’t unless people continue practicing social distancing,” Gov. Gavin Newsom said during a Wednesday afternoon press conference.Also Read: California Gov. Gavin Newsom Orders All Residents Statewide to Stay at HomeStatisticaOne reason for that may be the early action on the part of state and local officials. On March 16, six counties in California’s Bay Area — San Francisco, Santa Clara, San Mateo, Marin, Contra Costa and Alameda — announced a “shelter in place” order and closed nonessential businesses, launching one of the strictest orders issued in the U.S. at the time. Three days later, Los Angeles followed suit with a “safer at home” order, hours before California’s governor issued a statewide “stay at home” order that will last indefinitely.George Rutherford, the head of UCSF’s Division of Infectious Disease and Global Epidemiology, said that “shelter in place” or “stay at home” orders are most effective when they’re put in place before there’s widespread transmission of a highly contagious disease. “All our indications are that this is working,” Rutherford said of California’s early and aggressive social distancing measures.There are, of course, other geographic or cultural factors that may have given California an advantage in its fight against COVID-19 compared to states like New York, public health experts told TheWrap.Some of the main factors influencing a region’s infection rate include the number of people, the average distance between people, the number of interactions people are having with one another, whether people are moving between centers of infection, when the virus arrived, public health interventions and the number of tests conducted, Robert Siegel, a microbiology and immunology professor at Stanford, said.Also Read: LA County Closes All Public Beaches, Trails and Piers Through April 19And in New York, certain lifestyle differences — such as the concentration of people living and working in small areas and the widespread use of the subway and other public transport systems — means that more people are interacting more closely with one another. “Even in grocery stores, because of the cost of real estate, their aisles are closer together. So they have a lot of interactions,” Siegel said.Neal Baer, an adjunct professor in UCLA’s Department of Community Health Sciences, said that Los Angeles’ “car culture,” together with the city’s “safer at home” order, could be another “critical reason” as to why Angelenos have not yet seen as high a number of cases. “That’s not to say that people don’t get exposed in Los Angeles, but maybe we’re less exposed,” Baer said. “Two weeks ago, we were already sheltering, and we were in our cars weeks before then.”Still, health experts said that maintaining aggressive social distancing measures — alongside increasing the number of tests, protective gear and medical equipment like ventilators and ICU beds in hospitals — will be key to reducing the severity of the coronavirus outbreak in California and, for that matter, any other state in the U.S.“If it’s not done uniformly across the country,” Rutherford said, “the virus is going to continue to get reintroduced into the places that have done the right thing, and our effort will be for naught.”And aggressive measures on a city, state and federal level, health experts cautioned, can’t end when the coronavirus pandemic seems to be waning, either.“People say that we couldn’t afford to, but we’ve somehow found the money to fund a standing army that’s the largest in the world. And the reason we’ve done that is because the population believes that we need to protect ourselves, not from a war that’s happening now, but from a war that might occur,” Swatzberg said. “We know there’s going to be recurrent pandemics. There always have been and there are going to be until our science is a lot better. Why haven’t we prepared for that?”Read original story Why Isn’t California a Bigger Coronavirus Hot Spot? State Still Has Fewer Cases Than New York At TheWrap