Government Pension Liabilities $3 Trillion

Report: State, Local Gov’t Pension Funds Have More Unfunded Liabilities than Corporate Plans

By Barbara Hollingsworth | April 26, 2016 | 11:26 AM EDT

(CNSNews.com) – Pension plans for state and local government employees have more unfunded liabilities than corporate pension funds, which are held to a higher standard by the government, according to a March report entitled The Coming Pensions Crisis by Citi Global Perspectives & Solutions (GPS).

“In the United States, current unfunded corporate defined benefit commitments total approximately $425 billion. State and local government employee defined benefit pension plans have from $1 trillion to $3 trillion in unfunded commitments (depending on the discount rate used)....“Unfortunately, while governments often impose genuine requirements for funding contributions on corporate sponsors, they rarely impose those standards on themselves,” the Citi report stated.

“For example, in the U.S., public plans frequently increase benefits but fail to make the appropriate contribution,” the report continued.

“The Government Accounting Standards Board puts out the annual required contribution (ARC) but unfortunately, the word ‘required’ is just a word….The fact is that many public plan sponsors have simply not made the ARC.”

According to the U.S. Census Bureau’s latest Annual Survey of Public Pensions, “government contributions increased 11.1 percent” in 2014, “driving total contributions up 8.4 percent, from $153.7 billion to $166.6 billion.”

Earnings on pension fund investments also increased 40.6 percent that year, while the average annual benefit paid to more than 9.5 million state and local government retirees was $26,455, according to the Census Bureau.

But Citi warned that the trillions of dollars in unfunded liabilities will create serious financial problems for state and local governments over the next decade, when 45 million baby boomers are expected to retire.

“These liabilities also result in large generational imbalances as a declining ratio of workers to retirees puts unsustainable pressure on future taxpayers to fund a dramatically greater population of pensioners,” the report stated.

“In coming years, states like New Jersey and Illinois will face tremendous budget pressure due to expensive pension commitments. And many municipalities in California will face difficulty meeting their pension obligations to the state fund CalPERS (California Public Employees' Retirement System).”

According to an issue brief published last month by the National Association of State Retirement Administrators (NASRA), “4.1 percent [on average] of all state and local government spending is used to fund pension benefits for employees.”

Although the percentage differs from state to state, with Louisiana contributing the most (7.79 percent) and North Dakota (1.63 percent) the least, NASRA noted that employee contributions generally make up about a quarter of the total pension fund payments, with governments (i.e. taxpayers) contributing the remaining three quarters.

But in a September 2015 study, Andrew Biggs, a resident scholar at the American Enterprise Institute (AEI), found that “state and local governments have promised benefits well in excess of the assets they have accumulated to pay for them.

“If state and local governments were truly fully funding their pensions – that is, merely following the rules that the federal government requires for corporate pensions – their annual contributions would make up over 20% of total state and local government spending,” Biggs wrote in an April 1st article in Forbes.

“I found that, using corporate pension rules for valuing liabilities and amortizing unfunded liabilities, the average state and local pension contribution would rise from 24% of employee wages to 105%. That’s how big and expensive these plans are,” Biggs pointed out, adding that government pension plans are “barely better funded today than during the depths of the Great Recession.”

The Citi report came to the same conclusion: “A government plan with $75 billion in stated assets and $100 billion in stated liabilities would report that it is 75% funded. However, if it used the typical rate of a U.S. corporate plan, that funded ratio would drop to approximately 52%.”

The Center for Retirement Research at Boston College has state by state information on the funding ratio (ratio of assets to liabilities) of over 150 state and local government pension plans. 

http://www.cnsnews.com/news/article/barbara-hollingsworth/state-local-govt-pension-funds-have-more-unfunded-liabilities

Comments

Pension plans are unsustainable. The assumptions they made about lifespan and earnings have gone South. These plans are not able to earn enough to meet their defined benefit requirements.  The private sector dumped these pension plans decades ago, except for utilities.  Everybody went to 401K type defined contribution plans in the 1980s, where you own your plan balances.

The stock market goes up and down more than it goes up.  The other problem is that debt investments don’t pay as much interest as they did before.

The elephant in the room is government debt.  It’s too high to allow the government to allow interest rates to rise to “market”.  The other elephant is that the Big Banks have their $300 trillion in Federal Reserve printed money in derivative bets. Plus, the US Treasury wants the DOL to force investment organizations to put more money into Treasury Bills that pay a whapping 1.7%.

The course is clear.  Government must reduce its spending and its debt to allow the investment market to normalize.  Government must also reduce the amount these Big Banks can use to place bets with derivative contracts.  Finally, investment organizations will need to actively manage their stocks using the same “sell high / buy low” tactics regular active investors use.

If mortgage interest is allowed to go to 4% and interest earnings on savings is allowed to go to 2%, investors will be able to return to a “half stock / half CD strategy to save for their retirement.  Our actual retirement in most cases will be well above are 70, so this savings is really for years we would live after we become really too old to work.

Pension plans will need to modify benefits based on age starting at age 62 and drop “years of service”.  Plans that offer full retirement after 30 years of service will need to end.

Government will need to limit its footprint, automate and tighten headcount. The way Bills are passed will need to change to take the cost of enforcing the law into account.

Norb Leahy, Dunwoody GA Tea Party Leader