Latest public pension fund data show taxpayers still on hook for trillions

By Frank Keegan

Despite pension fund investment gains in 2010, taxpayers still owe state and municipal workers trillions of dollars for promised benefits no matter how much funds earn during the next 30 years.

According to data for the 4th Quarter released Thursday by the U.S. Census, cash and security holdings of the top 100 public pension plans gained 7.6 percent in 2009, the fifth consecutive quarterly year-over-year increase.

Census reported the funds reached “the highest level since the second quarter of 2008.”

Unfortunately, pension fund managers promise taxpayers and workers they will earn about 8 percent a year every year forever, and a loss of about 28 percent at the bottom of the recession would require a 62.5 percent gain the next year to fulfill their promise.

Spread across 20 to 30 years, funds would have to gain 9 percent to 11 percent every year to achieve their goal. That means no investment market ever could have another downturn for decades. It would require risk-free investments with the highest returns in history. Good luck.

Even if fund managers could achieve that, taxpayers during intervening years would have to come up with about $1 trillion to $1.5 trillion every year to fill intermittent funding gaps.

This Census survey “comprised 89.4 percent of financial activity among such entities.”

On that basis, the total immediate investment cash and security holdings shortfall is more than $1 trillion just for pensions, which will compound to $16 trillion to $34 trillion in additional hits to taxpayers during 20 to 30 years even if fund investments realize unprecedented gains.

Guaranteed pension costs continue to grow, and government must put taxpayer money into them every year whether investments produce promised returns or not.

Politicians’ false promise of retiree health care benefits adds more than $530 billion to the debt as of 2008, according to the Government Accountability Office, because “most of these governments do not have any assets set aside to fund them.”

Other estimates of the total retirement promise gap range from $1 trillion using old data and official assumptions from the Pew Center on the States, to $3 trillion to $5 trillion based on other accounting standards.

An update of the Pew study that includes data from the beginning of the recession is due out next week. No matter what the actual number is, experts agree it will continue to grow and require more contributions from spending cuts and tax increases now.

A report released Thursday by Standard & Poor’s confirms that despite recent gains, “The funded ratios of U.S. states’ pension funds continue decline ….”

Credit analyst Gabriel Petek wrote in “U.S. States’ Pension Funded Ratios Drift Downward” that “Without exception, reduced pension asset values relative to estimated liabilities is placing upward pressure on the annual required contributions of state governments, compounding what is already a difficult budget cycle for most states.”

S&P focuses on whether states will be able to pay their debts, not whether taxpayers can bleed more for the hidden tab politicians have run up. The report says:

  • Pension liabilities and current contributions are not presently jeopardizing any state’s capacity to meet its debt service obligations;
  • There is general upward pressure on recommended contributions (actuarially determined) to pension funds due to the phasing-in of market losses in 2008;
  • Pension reform efforts could help contain the rate at which some estimated long-term pension liabilities are growing. The significance of near-term fiscal relief generated from these reforms in most cases remains to be seen; and,
  • Early indications in 2011 suggest that deteriorating pension funded ratios — when coupled with a lack of full actuarial contributions — could serve as a source of potential credit pressure for some states.”

That all adds up to major service cuts and tax increases now to make sure public workers get their pension benefits and bondholders get their principal and interest payments.

With states facing billions in operating deficits despite revenue higher than pre-recession levels, coming up with the money they must invest now to avoid certain catastrophe in the future is going to be tough.

Especially on beleaguered taxpayers who now know state government puts them last on the priority list behind public workers and bondholders.

Frank Keegan is a national editor for The Franklin Center for Government and Public Integrity, watchdog.org and statehousenewsonline.com. Any disgusted public employee, journalist, activist organization or citizen watchdog who wants help exposing government waste, fraud and abuse may contact him at: frank.keegan@franklincenterhq.org.


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