Federal Bailout No More! State and Local Governments Must Deal With TheirOwn Pension Predicaments | Citizens Against Government Waste

Federal Bailout No More! State and Local Governments Must Deal With TheirOwn Pension Predicaments

The WasteWatcher

In December 2008, state governments had nearly $1.94 trillion set aside in pension funds for approximately 20 million active state and local government employees and seven million retirees and dependents who currently receive benefits. 

Using market-based discount rates that reflect the risk profile of pension liabilities, finance professors Robert Novy-Marx of the University of Chicago and Joshua Rauhof Northwestern University calculated that states have pension liabilities of $5.17 trillion, which means that state pension plans are unfunded by $3.23 trillion.  Local government pension plans are unfunded by $574 billion. 

Government accounting standards, however, show that states’ unfunded pension liability is$1 trillion.  The undervaluation is due to the fact that government accounting standards require state and local governments to discount liabilities at an unrealistically high rate of return on their assets.  In New Jersey, for example, the state government projects an 8.25 percent rate of return when, in reality, the rate of return on underlying assets is probably much lower due to the recent economic slump.  According to Andrew Biggs of the American Enterprise Institute, if New Jersey’s pension plans were recalculated applying the same rates as private pension plans, the tab would be $145 billion: $113 billion more than the reported $32 billion liability.

These faulty accounting practices are dangerous and misguiding.  While the rate of return on pension assets fluctuates, the fiscal promises made to state and local employees do not.  Moreover, taxpayers who foot the bill for pension funds do not have a realistic estimate of how indebted they are to state and local governments.

State and local governments’ empty coffers should not ignored, nor should they become dependent on federal bailouts to ensure the fiscal soundness of their pension plans. Thankfully, some lawmakers on Capitol Hill have already begun to highlight this massive problem, proposing legislation that would publicize state and local pension fund balance sheets and prohibit the federal government from bailing out funds that have failed to act in a fiscally responsible manner.

Rep. Devin Nunes’ (R-Calif.) will be introducing the State and Local Pension Transparency and Accountability Act.  The bill will require state and local government pension plans to disclose the true nature of their liabilities with the Secretary of the Treasury and to make their financial statements available to the public through a searchable website.  This is an important step in tackling state and local pension fund liabilities, as increasing transparency will make lawmakers more accountable to taxpayers and compel them to deal with the reality of their fiscal crises. 

Rep. Jason Chaffetz (R-Utah) plans to introduce a non-binding resolution which will express opposition to a federal bailout of state and local government employee pension plans and other post-employment benefit plans, and promote the replacement of defined benefit plans with defined contribution plans as a solution for controlling ballooning liabilities.  Switching to a defined contribution plan would allow employees to set aside money that would generate savings for their own retirement, rather than funding benefits for current retirees. Additionally, under a defined contribution plan, state and local governments would not bear the risks associated with underfunding or underperformance of fund assets. 

With a growing $13.7 trillion debt, the federal government cannot and should not be responsible for fiscally irresponsible states, especially at the expense of taxpayers and those states which have properly managed their budgets.   Efforts like those of Reps. Nunes and Chaffetz to increase transparency, call attention to the pension liability issue, and quash the expectation of a federal bailout will force states and localities to confront their problems and consider real reforms that could save taxpayers billions. 

States and localities can no longer rest on their laurels as their pension liabilitiesand reliance on a federal rescue package continues to grow.  State and local governments must understand the urgency of the situation and be pressured to implement changes before they are faced with filing bankruptcy, or worse, forcing their financial problems beyond their borders onto the American people.

  -- Erica Gordon

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The WasteWatcher: The Staff Blog of Citizens Against Government Waste