The Hoover Institution has published “Hidden Debt, Hidden Deficits” – a new study by Hoover Institution Senior Fellow Joshua Rauh that calls attention to the fact that almost no state or local government is running a balanced budget, with the reality being that runaway pension costs are consuming state and local budgets.
“The problem of unfunded pension liabilities has become too big to ignore,” said Mr. Rauh. “State and local governments promise guaranteed pensions based on targeted returns that are far from certain. In reality, assets in the pension systems will be insufficient to pay for these promises to retirees, resulting in a heavy burden being placed on taxpayers to make up the difference.”
According to Mr. Rauh, despite new Governmental Accounting Standard Board guidelines, the majority of public pension systems in the US still calculate their pension costs and liabilities using the assumption that their contributed assets will achieve returns of 7 to 8 percent a year, ignoring the extent of public sector liabilities. To target these investment returns, systems have taken larger positions in public equities and other higher return asset classes such as private equity, hedge funds, and real estate. The targeted returns may or may not be achieved, but public sector accounting and budgeting proceed as though they will be achieved with certainty.
“This study shows that unfunded pension liabilities are devastatingly widespread and only getting worse,” said Mr. Rauh. “With hundreds of state and local governments drowning in retiree benefit debt, the need for bold structural reform has never been so pertinent. We need to bring local and state governments’ retiree benefits back to solvency before we see this vast epidemic limit the ability of state and local governments to provide adequate services in areas such as public safety and education.”
The study covers 564 state and local systems in the US that reported $1.9 trillion in unfunded pension liabilities under GASB 67 in fiscal year 2014. The analysis reveals that, despite well-performing markets from 2009 to 2014, state and local government pension systems are underwater by $3.4 trillion and that the true cost of keeping pension liabilities from rising is to increase average contributions to 17.5 percent of state and local budgets. Even contributions of those magnitudes would not begin to pay down the trillions of dollars of unfunded legacy liabilities; they would simply stop the unfunded liability from rising.
Click HERE to access a copy of Hidden Debt, Hidden Deficits (62 pages).
Joshua Rauh is a Senior Fellow at the Hoover Institution and a Professor of Finance at the Stanford Graduate School of Business. He formerly taught at the University of Chicago and Northwestern University. His research on state and local pension systems in the United States has received national media coverage in outlets such as the Wall Street Journal, the New York Times, the Financial Times, and The Economist.
The Hoover Institution is a public policy research center and part of Stanford University. The institute is based in Stanford, CA (www.hoover.org).
© 2016 Private Equity Professional • Private Equity’s Leading News Magazine • 4-12-16
