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Rick Moran


September 8, 2013 - 1:33 pm

The state pension crisis that’s been known about for years is probably far worse than the states let on. The unfunded liabilities of state pension funds may be as much as $4.1 trillion, if you use a more realistic rate of return on investment.

The new report, from State Budget Solutions assumes a modest 3.2% return rather than the 7% or more that most states use to calculate their liabilities.

Walter Russell Meade:

America’s pension crisis may be much worse than we thought. A new report from State Budget Solutions looks at each state’s pension liabilities using a lower estimate of the rate of return than the states use themselves, and found that the country’s plans are underfunded by $4.1 trillion, and only 39 percent funded overall. The state-by-state breakdown looks even worse, with Illinois, Connecticut, Kentucky and Kansas holding plans that are less than 30 percent funded, and another 27 states below 40 percent. Other states have it bad as well: Reuters notes that in five states, pension liabilities more than 40 percent as large as the state’s economy as a whole, and in Ohio and New Mexico, they’re more than half as large. Considering that many people consider plans to be “safe” only when their funded level is over 80 percent, this is troubling news indeed.

These numbers are significantly higher than those we’ve seen before, which is due to the extremely conservative estimates of the rate of return. Rather than assuming a rate of return in the 7-9 percent range, as most plans do, State Budget Solutions is using the “risk free” rate of 3.225 percent, which is tied to the yield on treasury.

The state of Illinois was hit by an SEC suit because they tried to hide the underfunding of their pension system from investors:

An SEC investigation revealed that Illinois failed to inform investors about the impact of problems with its pension funding schedule as the state offered and sold more than $2.2 billion worth of municipal bonds from 2005 to early 2009. Illinois failed to disclose that its statutory plan significantly underfunded the state’s pension obligations and increased the risk to its overall financial condition. The state also misled investors about the effect of changes to its statutory plan.

A special panel charged with reforming the pension system in Illinois may be nearing an agreement, although they’ve been close before and failed in the end. The only way the panel is working at all is because Governor Pat Quinn withheld pay from state legislators unless they took pension reform seriously.

Illinois may be the worst of the worst, but a couple of dozen other states are in serious trouble with funding their pensions. Their optimistic estimates about rates of return is making the problem appear manageable, when in fact, the danger of default is only as far away as the next economic downturn.

The usual suspects on the left claim there is no pension crisis, that it’s manufactured by right wingers to deny the noble public worker his just deserts following a career of service and sacrifice.

Which, of course, is why a Democratic governor cut off the pay of Democratic legislators in Illinois because the non-pension crisis that really only exists in our paranoid heads isn’t really important.

Glad we got that cleared up.

Rick Moran is PJ Media's Chicago editor and Blog editor at The American Thinker. He is also host of the"RINO Hour of Power" on Blog Talk Radio. His own blog is Right Wing Nut House.

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Looks like my dad was wise to take his entire holding stake in the state pension find in one payout ... Had he not done so, Kansas might have gone belly up on him.
1 year ago
1 year ago Link To Comment
Here's a dirty little secret: actuaries working for governments are just another government contractor/expert who'll do what they're being paid to do and find what they're being told to find. Most public pension plans, at least the statutory ones, not necessarily the bargained ones that unions run, have a requirement that an independent actuarial analysis of the plan be performed periodically and contribution rate(s) set as required by that analysis. Theoretically that is all done objectively and responsible managers set the rate as the actuary recommends. But ...

Suppose the actuary says you need to be making 5% higher contributions. You have to go tell a Legislature that you need 5% more in personal services appropriations, or you need to tell your employees that you're essentially cutting their pay by 5%, or unable to give them the raise their union wants (or some combination of these), or you can buck up and pay the 5% additional by leaving more positions vacant for longer periods, or you can maintain your staffing but accept that it leaves you 5% less program budget. There are no options that a public manager who has to respond to political pressures likes and you will NOT be rewarded for doing the right thing. But ...

The actuaries that do public pensions do public pension work almost exclusively; they know how to keep their clients happy. If the government manager that is doing the contracting for the actuary lets the actuary know that it would be very inconvenient for the government to have to make greater contributions, the odds are pretty good the actuary will find that the government doesn't need to make greater contributions.

You'll note my state, Alaska, is in that badly underfunded bottom 5. First, we reacted to the problem in '05 and have gone to a defined contribution plan for all new employees since '06. Doing that actually makes your plan appear even more underfunded for some time because you stop paying into the funds that support the defined benefit plans with new employees' contributions. You have greater and greater pension liability in the legacy plan(s) as people retire and you have fewer and fewer people paying in because they're not in the legacy plan(s). You have to accept that when you stop paying into the funds for the legacy plans, you'll have to meet pension obligations with current revenue at sometime in the future.

Interestingly, in the late '80s our legacy plans seemed overfunded and there was considerable fear of the Legislature discovering that the retirement fund might be a good place to get some money as we dealt with the revenue issues caused by the mid-'80s oil price crash. That didn't happen and the nominally Republican Administration frankly neglected the system in the early '90s and did nothing to, for, or with it. We got a Democrat in '94 and the unions had "needs." The Administration couldn't get any money to satisfy those "needs" out of the Legislature so they were doing all sorts of things that they could do administratively to keep their union "friends" happy. They were also keeping their friends in the polisubs happy by not being at all agressive in making them actually pay what they owed the plan. One of those things they gave the unions was horrendous grade creep in the form of reclassifications that gave people raises in ways that didn't have to be submitted to the Legislature. We had an ageing workforce and by the late '90s over 50% of our upper-level professional, technical, and supervisory/managerial employees were within 5 years of retirement. You might have noticed that there was also a fairly good amound of inflation in the '90s. And yet, the Administration was still claiming it didn't need to increase the retirement contribution for either employees or employers. Everybody knew better, but the Administration kept waving the actuary's report.

By the time we took over in '02, it was common knowledge that the situation was soon to be desperate. We ran off everybody who'd been associated with it tried to see if we could fix it and concluded that the only solution was to ditch the legacy plans and go to defined contribution. I don't remember if we filed the lawsuit against the actuary the prior administration had used, I know I recommended that we not, or whether the actual suit was filed by the Palin Administration. But long story short, the actuarial firm, a big name, settled for a lot of money but really a pittance compared to what their actual liability could have been if had been proven they erred that badly. That pittance fell in to what we advocates called "go away money." Neither party really wanted the things to come out that could have been brought out had that case gone to trial; some well-tended reputations would definitely have suffered, so they arrived at a face-saving resolution. It's a dirty business!
1 year ago
1 year ago Link To Comment
In "That Hideous Strength" C. S. Lewis wrote, "It is the courtesy of deep heaven that if you meant well, you meant better than you knew."

The converse is also true, "When a politician says they have trouble, the trouble is far worse than they're letting on"
1 year ago
1 year ago Link To Comment
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