Public employees and their unions have the nation’s taxpayers – and, ironically, themselves – teed up for long drive into the rough and there may be no recovery if cities, counties, and states don’t take dramatic action soon.
You’ve likely heard about “unfunded pension liabilities” that are beginning to cause cities to seek Chapter 9 Bankruptcy filings. Detroit was the largest city to seek such refuge, but dozens if not hundreds of cities, and a couple of states, may not be far behind. The reason, public employee pensions, is just part of the problem. The real problem is that governmental units are not transparent in their pension cost reporting, and they’re not required to follow the same reporting rules as private sector pensions.
Pension accounting is more art than science. Actuaries calculate today’s savings rate based on forecasts about life spans, investment returns and other factors.
San Diego officials say they can reliably earn 7.25 percent a year, while their county colleagues reckon a whopping 7.75 percent.
This is astonishing, because the risk-free, 10-year Treasury paid about 2.25 percent last week.
For perspective, federal law forces the private sector to use an index of safe, investment-grade bonds to value pension liabilities. This is precisely because executives abused return assumptions so they could save less for workers, bankrupting plans.
And the miracle of compounding does amazing things, especially in reverse. Lowering the city and county return assumptions to the bond index, which yields 4 percent these days, nearly quadruples unfunded liabilities.
If the official fantasy number is $3.86 billion, the market reality figure is $14.5 billion, using the methodology of Moody’s Investors Service, which rates municipal bonds.
Every public pension fund plays this game. CalPERS, the California State Pension system, is reporting a shortfall of $260 billion. The problem with that number is that they are assuming a return on investment of 7.5% in order to get to the $260B number. In and of itself, $260B isn’t pocket change, but the reality is much, much worse.
In fact, using public sector accounting rules, CalPERS shortfall is more like $986 billion. Because the shortfall is projected over the life of the fund, when it hits it’s going to be way too late to actually do anything about it.
Illinois is in the same boat. Their pension reporting is showing shortfalls of about $111 billion but the reality is nearly $400 billion.
Bringing the big numbers down to a personal level is a real eye opening experience. Let’s look at how much every individual – not every taxpayer, every individual – owes the public employee pension fund.
If you’re a California resident, you owe your public employee pension fund almost $20,000. Family of four, $80,000. Every resident of Illinois owes their public employees about $41,000. Family of four, $164,000.
Is it any wonder people are moving out of California and Illinois as fast as they can?
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