Despite requirements to fully account for and balance spending and revenue, state governments are carrying a massive amount of unfunded liabilities on their accounting sheets—endangering the finances of future taxpayers and retiring public-sector employees alike.
New research conducted by State Budget Solutions (SBS)—a nonpartisan public policy organization focusing on local and state budget issues—estimates the total of states’ unfunded public pension liabilities to be $4.7 trillion, increasing by more than 14 percent since last year.
Conversely, SBS’ research determined that, in total, U.S. states’ public pension plans are actually able to only pay 36 percent of their combined obligation to retiring U.S. public-sector workers. If the value of the remaining unfunded liability was split among all American citizens, each person would have to pay over $15,000 to fulfill pension promises made by state and local governments.
“Our research shows that despite the rosy investment numbers that you might hear this year, state pension plans have a serious, structural issue that needs to be solved sooner than later,” explained Joe Luppino-Esposito, general counsel for SBS.
Smoke and Mirrors
By using accounting tricks and gimmicks, however, public-sector pension fund managers have worked to conceal the funds’ inability to keep promises of lavish benefits and pensions. By assuming that future years will bring better investment returns, state pension funds are able to give the appearance of better financial health than may actually be the case.
After assessing the real health of states’ programs by calculating the difference between projected investment return rates and realistic rates of investment returns, SBS crowned California with the dubious honor of the largest carrier of unfunded liability.
According to the report, California’s public pension system carries $754,049,342,000 in unfunded pension liabilities—sticking every resident with the equivalent of a bill for $19,671.
Wisconsin’s public pension system is in the best shape, relatively speaking. Using the amount of money that the system might realistically expect to receive in the future, the Badger State is able to pay about 67 percent of its total obligations.
This partial success, the report notes, is primarily due to the state’s assumptions for future returns. Wisconsin pension projections plan to receive 5.5 percent annually on pension investments, as opposed to discount rates exceeding 7 percent used by most other states.
“States use higher discount rates in order to put as little money into the system as possible today, assuming great gains in the future,” Luppino-Esposito explained. “What makes this worse, is when politicians ‘borrow’ from the pension plan’s required contributions in order to ‘balance’ the regular budget.”
Singling out New Jersey as a state skipping out on its pension obligations, the report notes that the Garden State has reduced its annual pension funding by $2.4 billion, in order to increase spending elsewhere. The ratio of the state’s unfunded pension liabilities—$200,150,052,000—to the value of the state’s total economic output is 37 percent, larger than 41 other states.
“The liability also takes up large percentages of the gross state product of every state, making it clear that we can’t just tax our way out of the problem,” Luppino-Esposito said.
Stuck with the Bill
Another factor detailed within the report is the determination of state pension funds’ unfunded liabilities per capita. By simulating the equal division of a state’s unfunded liability among all residents, differences between states can be held equal, as the data is instead presented in terms of how it would affect any single resident.
Although the report described state government pensions as generally “gloomy,” Luppino-Esposito said that it was not impossible to avoid the “bleak” outlook detailed within the report.
“State residents should be on the lookout for reforms when they arise in their states. Those who support these pension plans’ risky accounting are quick to demonize reformers for trying to ‘steal’ pensions from teachers and firefighters. Don’t believe them,” he explained.
“Pension reform ensures that the money is still there for government employees, and also ensures that the government has enough money to pay the teachers and firefighters currently on the job,” he concluded.
Jesse Hathaway ([email protected]) is managing editor of Budget & Tax News.
“State Budget Solutions 2014 Unfunded Pension Liabilities Report,” State Budget Solutions, http://heartland.org/policy-documents/state-budget-solutions-2014-unfunded-pension-liabilities-report