Opinion: Local, state pensions fall another $1.5 trillion short so far this year

Public pensions just keep falling further and further behind. In fact, they have fallen so far they never can get up again. The local and state pension crisis got at least $300 billion worse in the first quarter of this year compared to 2011, according to analysis of latest data released by the U.S. Census Bureau. That added at least $1.5 trillion to the shortfall — calculated at $800 billion to more than $4 trillion as of 2010 — future taxpayers must make up on top of all other taxes and rate hikes.

Despite the Great Recession forcing reduction of some future costs by 43 states and some municipalities, public pension obligations still increased 5.5 percent through 2010, according to the latest U.S. Census Bureau full fiscal year data available.

That obligation increase coupled with failure of pension investment managers to meet growth and earnings goals compounds to lock states and municipalities into a fiscal death spiral.

Take a look at Census “Quarterly Survey of Public Pensions” First Quarter data for proof. While pension investment values increased almost 5.7 percent from the last quarter of 2011, they were virtually flat to the First Quarter instead of showing the 8 percent gain funds must have to pay benefits.

For comparison, private defined contribution plans increased 8.7 percent, according to a survey by consulting firm Callan Associates. 

This Census survey accepts data from the top 100 – representing 89.4 percent of “financial activity” — of the more than 3,400 state and local pension plans. Defined benefit pensions must earn enough on investments each year to pay benefits now and grow in value enough to pay future promised benefits. Instead of growing every year, public funds as of now are $51 billion below their 2008 peak. Enough money was invested each year to pay promised benefits if it earned 8 percent every year forever. As investments fall short and pension promises grow, the debt increases.

According to economists Robert Novy-Marx and Joshua Rauh, the existing total shortfall will cost the average American household almost $1,400  every year for the next three decades in additional taxes for which they will get no government services or benefits.

Because Census reported total “Cash and Security Holdings” in the first quarter of this year at $2.76 trillion, compared to $2.74 trillion in First Quarter 2011, that tax bill just went up.

The cumulative gain of 6.6 percent since 2006 was about one ninth the 59 percent needed just to fulfill pension promises already made.

To get a grip on how hopeless this catastrophe is, consider that even if public pension fund managers can average 11 percent investment returns every year through 2026, taxpayers still will have to come up with an extra $22 trillion total in between just to pay benefits.

If politicians push – as all of them do — to put pensions on easy pay and stretch the break-even period through 2031, fund investment managers have to earn more than 10 percent on average every year, and taxpayers still will have to cough up an extra $31 trillion.

If politicians want to totally deny reality until they’ve pocketed their skim and fled the scene of their crimes against future generations, they can claim pension investments will average 9.8 percent every year through 2036 to achieve their mythical 8 percent discount rate. However that delusion will cost taxpayers an extra $44 trillion.

If there is any kind of downturn in any investment market of any kind anywhere in the world over the next few decades, it will cost taxpayers a lot more.

These latest Census data proves the local and state defined benefit pension system is fundamentally flawed and must have immediate “drastic reform,” as stated emphatically in a recent study by economists at the Harvard Kennedy School Mossavar-Rahmani Center.

That study, along with others by the Government Accountability Office and the Federal Reserve Bank of Cleveland, prove the urgency of pension reform now.
Editor’s Note: Read more of Frank Keegan’s analyses here. A range of studies focused on America’s public pension challenges can be viewed here.