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PrintJuly 6, 2009
Keeping taxpayers in the dark about underfunded public pensions
There is a ticking time bomb out there that is ready to explode in the faces of taxpayers. It is the problem of underfunded, overly generous public pensions that are in such bad shape, officials have gone to extraordinary lengths to hide the bad news from taxpayers.
A few weeks ago in my American Issues Project article on this issue, I highlighted some of the problems:
In truth, the "Time Bomb" of underfunded, overly generous public pensions, which many observers have been predicting for years, appears ready to blow up in our faces. Recent losses in the stock market have devastated these funds to the tune of $2 trillion, monies for which we taxpayers are still responsible. And considering that more than half of these plans were underfunded to begin with, we are faced with a potential tsunami of pension fund failures that, by law, taxpayers will be forced to make right.And as Andrew Biggs of the Wall Street Journal reports, some fund managers have taken to "cooking the books" in other inventive ways:
The numbers are worse using market valuation methods (the methods private-sector plans must use), which discount benefit liabilities at lower interest rates to reflect the chance that the expected returns won't be realized. Using that method, University of Chicago economists Robert Novy-Marx and Joshua Rauh calculate that, even prior to the market collapse, public pensions were actually short by nearly $2 trillion. That's nearly $87,000 per plan participant. With employee benefits guaranteed by law and sometimes even by state constitutions, it's likely these gargantuan shortfalls will have to be borne by unsuspecting taxpayers.
Some public pension administrators have a strategy, though: Keep taxpayers unsuspecting. The Montana Public Employees' Retirement Board and the Montana Teachers' Retirement System declare in a recent solicitation for actuarial services that "If the Primary Actuary or the Actuarial Firm supports [market valuation] for public pension plans, their proposal may be disqualified from further consideration."
Scott Miller, legal counsel of the Montana Public Employees Board, was more straightforward: "The point is we aren't interested in bringing in an actuary to pressure the board to adopt market value of liabilities theory."
If taxpayers knew they were legally on the hook for fully funding these pension plans, it would not go well with state and local officials who not only have negotiated these overly generous plans but have desperately been trying to hide their true cost until they are safely out of office. The whole issue has been kicked down the road for years.
Very soon, a reckoning for many of these plans will be in the offing.
Hat Tip: Ed Lasky
