Fiscal Armageddon: Actuarial foreplay, public debt and inadequate paranoia
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Published: 11-Jan-2014

OKLAHOMA CITY – Musings from a debt-obsessed, if not yet paranoid, analyst:

There are contending schools of thought about just how bad the cumulative national debt really is.

There are even debates on the conservative to libertarian end of the spectrum, including on the extent of state-level debt. For the most part, these are matters of degree, and not of kind.

A timely example of the state-debt debate, reported previously in this space: A new report from State Budget Solutions estimated Oklahoma’s total public debt at around $44 billion, with $41 billion of that from government pension debt alone. Mega-Yikes.

The government of Oklahoma, across its wide range of public pension plans, puts the pension debt at more than $11 billion – a lot less than the more than $16 billion in unfunded pension liabilities state taxpayers faced before enactment of rather significant reforms in 2011, but still more than the $10 billion or so in immediate aftermath of those reforms.

In other words, after overdue improvements, it only took a year for Oklahoma to slip backwards roughly $1 billion or so.
Nationally, as of 2010 the Pew Center on the States puts pension debt in a category I’d characterize as “pretty damn high” (shy of $2 trillion).

SBS, on the other hand, gives a near-Armageddon estimate of pension debt at around $3.9 trillion. Keep in mind that listing is the crucial subset of what could be considered ‘god-awful’ total state debt of $5.1 trillion

The different projections come from assumptions, and everyone is entitled to their assumptions.

Studying pension debt leads one to phrases like “discount rate,” “rate of return” and “economic assumptions.” Learning those words is helpful, but not absolutely essential to get the big picture.

Bottom line, Oklahoma’s pension managers assume they will get strong investment returns. And, after a long history of dreadfully weak performance, a couple of the Sooner State’s pensions (most notably the Teachers Retirement System) have been performing admirably, even after the Great Recession.

SBS consists of a serious people, including Cory Eucalitto, author of the newest report. These analysts base projections about long-term state debt on poor public investment performance since Great Recession.

Those who quarrel with SBS often do so because they believe that, eventually if not already, investments will return to relatively high returns.

Whether from SBS or Pew or any other group or analyst, debt estimates could be deemed (as a fellow journalist put it this week) the annual wild guess.

That same colleague deployed this: “All of these figures are based on assumptions, predictions and other actuarial foreplay.”
Good humor, in service of a serious point.

The assumptions and motivations of Pew, SBS and groups like IFTA (Institute for Truth in Accounting), are honorable, but different. I incline a certain direction, but don’t know who is closest to right because all final answers lie in the future.

What I do know is that over the last few years the gurus of accounting (see again “discount rates,” “rates of return” and so forth) have – arguably two decades too late – said that public (read: government) entities must be more transparent about long-term unfunded debt.

American governments at all levels are indeed growing more honest, at least when it comes to debt burdens. What’s widely agreed upon among specialists and many pundits, your humble servant included, is this:

Annual deficits are bequeathing a dreadful burden to the next few generations of Americans. Unfunded pension liabilities are driving state-level debt.

That’s why some unusual suspects – New York Gov. Andrew Cuomo, for example – are beginning to sound like Ronald Reagan redux, if not yet like the late Joseph Sobran.

Sobran was a paleo-conservative, as old as Old Right can get. I am more of a Reagan conservative, but like Joe (who grew so disenchanted with the party of Lincoln that he ran for vice president for the Constitution Party) I am less “Republican” today than during the Reagan years.

Life, and paying attention to actual behavior rather than the rhetoric of self-designated “Reaganites” can do that to you, but I digress.

Joe coined a political “law” to posit, in paraphrase, that the end result of every liberal economic experiment of the Twentieth Century had turned out, after all the data was in, much worse than the initial overwrought and over-the-top conservative analyses and commentaries had outlined.

To put Sobran’s Law another way, things are always worse than they seem.

Fellow citizens, apply your own system of “discounting” to alarmist-sounding prognostications of SBS and other groups. But remember this from John Estus, who works for Oklahoma Secretary of Finance Preston Doerflinger:

“No other debt issue Oklahoma faces holds a candle to the unfunded pension liability.”

Start with pensions, and agree that unfunded long-term debt matters, whether you’re Andrew Cuomo or libertarian economist Gary North (Ron Paul’s economist), or somewhere in between.

You may contact Pat at Patrick@capitolbeatok.com.

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