US public pensions face a shortfall of $2,500 billion that will force state and local governments to sell assets and make deep cuts to services, according to the former chairman of New Jersey’s pension fund.
The severe US economic recession has cast a spotlight on years of fiscal mismanagement, including chronic underfunding of retirement promises.
“States face cost pressure, most prominently from retirement benefits and Medicaid [the health programme for the poor],” Orin Kramer told the Financial Times.
“One consequence is that asset sales and privatisation will pick up. The very unfortunate consequence is that various safety nets for the most vulnerable citizens will be cut back.”
Mr Kramer, an influential figure in the Democratic party and still a member of the investment council that oversees the New Jersey pension fund, has been an outspoken critic of public pension accounting, which allows for the averaging of investment gains and losses over a number of years through a process called “smoothing”.
Using data from the states, the Pew Center on the States, a research group, has estimated a funding gap for pension, healthcare and other non-pension benefits, such as life assurance, of at least $1,000 billion as of the end of fiscal 2008.
Chris Christie, the Republican governor of New Jersey, said in his state of the state speech last week that, without reform, the unfunded liability of the state’s pension system would rise from $54 billion now to $183 billion within 30 years.
Mr Kramer’s estimates are based on the assets and liabilities of the top 25 public pension funds at the end of 2010. The gap has risen from an estimate of more than $2,000 billion at the end of 2009.
He also used a market rate analysis based on the accounting used by corporate pension funds rather than the 8 percent rate of return that most public funds use in calculations. Pension liabilities are not included in state and local government debt figures.
Pension liabilities not included in State and Local government debt figures? Doesn't that sound like off balance sheet accounting....................just like Enron.
No, they are not inflating asset values to support higher stock values, but they are under reporting liabilities to the public to make true deficits look smaller and more manageable. If this issue were a public company, management of some kind would be facing criminal changes.
But the bigger issue or elephant in the room is how much larger these unfunded liabilities are! They dwarf the currently reported state and local government deficits.
Bankruptcy: If there's one reason to file bankruptcy or default on bond payments, it's these pension liabilities facing municipal governments. There's no way the tax payer via higher taxes and/or muni asset sales is ever coming close to funding these pension obligations. It would required a doubling or tripling of state and/or local taxes for many many years, which if imposed would collapse the economy.
Illinois: The idiots in Illinois are going to issue more debt on balance sheet to pay for off balance sheet liabilities. That's in essence playing the shell game with the problem. Then what happens next year when another payment to the pension system is due? When does the insanity stop?
Bankruptcy, it's still the right solution for many municipalities, but it's not going to happen until the public gets off their rump and demands the right course of action! Otherwise, pubic unions will keep bull dozing the system in their favor and the problem gets worse.
Hope all is well.
J.D. Rosendahl, Rosey