Study: State, local public retirement liability $1.2 trillion


Friday, April 9th, 2010

A study by a public employee pension think tank underestimates the liability of retirement plans by billions of dollars.

By Frank Keegan

A think tank with ties to public employee pensions has released a study of state and local pension plans that may underestimate the unfunded liability by trillions of dollars.

The Funding of State and Local Pensions: 2009-2013 released Thursday by the Center for State and Local Government Excellence studied 109 state and 17 local government pension plans and came up with an unfunded liability of about $1.2 trillion by 2013. Overall, plans will be at funding ratios of 66 percent to 72 percent.

According to CSLGE Research Vice President Josh Franzel, the study "collected data from the plans' financial documents," including assumptions about rates of return and investment growth.

He said the study did not include liabilities for promised health care for retirees because an earlier CSLGE study dealt with that issue.

CSLGE is a foundation formed in 2007 by ICMA-RC, a not-for-profit financial services company that "manages and administers retirement plans exclusively for the benefit of public sector employers and employees."

Other studies this year put pension and retiree health costs to taxpayers much higher, at $3 trillion to $7 trillion.

According to a December 2009 study by economists Robert Novy-Marx and Joshua Rauh, “liabilities across all 50 states amount to $3.21 trillion. This calculation probably understates the liability …. Using zero-coupon Treasury yields … total liabilities are $5.20 trillion. Liabilities are even larger under broader concepts that account for projected salary growth and future service.”

Andrew Biggs of the American Enterprise Institute estimates the unfunded pension liability to be as high as $3 trillion now.

The Government Accountability Office just put out a limited estimate for state and local retiree health benefits alone at $530 billion in the hole.

Pew Center on the States estimates at least $1 trillion in total retirement benefits underfunding, and qualifies its study as probably being overly optimistic because it used official numbers. 

The CSLGE pension study authors acknowledge, "the only funding information available for public sector plans is that based on each plan’s actuarial costing method and assumptions."

But even using optimistic numbers, the retirement plans still require contributions of billions of dollars every year from public employees and taxpayers.

The study says, "A major increase in contributions is not realistic at this time. States and localities may have only limited ability to increase employee contributions, because some state courts have ruled that the public employer is prohibited from modifying the plan for existing employees. Higher contributions from new employees will take a long time to have any substantial effect. Thus, if funding levels are to be restored quickly, the money must come primarily from tax revenues. But the recession has decimated tax revenues and increased the demand for state and local services. Thus, finding additional taxes to make up for market losses will be extremely difficult."

Franzel said "the $1-3 trillion numbers grab headlines, but it's important for the public to know that this should not be a race to the bottom" on worker benefits.

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