We know that public pensions are significantly underfunded, but answering the question of “just how underfunded?” is harder than you might think. This is because pension plans can make accounting choices that change their reported funding gaps without any change in the amount of assets they hold or the liabilities they owe. Sometimes, these choices hide the true extent of pension underfunding, leading lawmakers and taxpayers to underestimate the true cost of promises to public employees.
This primer covers two key accounting concepts that are used and misused to determine a pension plan’s funding gap. One, selection of the “discount rate,” regards the amount of money that must be set aside in the present to cover a liability due far in the future. The other, “asset smoothing,” refers to the way pension plans recognize unusually strong or weak asset returns, such as those we have seen since the second half of 2008... continue reading >>
A new report from the California Public Policy Center concluded that "The total outstanding government debt confronting California's taxpayers is bigger than is generally known." The total outstanding debts soar above $800 billion when all forms of debt are accounted for. The study also shows that if the state's retirement systems used a realistic rate of return on their investments (4.5 percent), then the unfunded pension liability soars to $1.1 trillion. California's Democratic leaders -- and only Democrats are leaders here these days -- insist that the pension problem is behind them. They are looking for new ways to raise taxes so that they can keep the spending train going. Even the state's Democratic "moderates" have no appetite for pension reform. Things are going to get worse here before they get better.
The enactment in 2011 of a 2 percent cap on local property tax levy increases was a signature achievement of Andrew Cuomo's first year as governor of New York. But to get it passed, he allowed his fellow Democrats in the state Assembly to insert a clause making it easier for local governments and school districts to pass along a portion of their rising pension costs in years when such increases are especially big.
The result is detailed in this new Empire Center analysis
: in the second year of Cuomo's cap, the "allowable levy limit" will actually average 4.6 percent, driven mainly by rising teacher pension costs. And, ironically enough, the pension exclusion will make it easiest
to raise taxes in districts whose homeowners can afford it the least.
But hey -- it could be worse. New Jersey's 2 percent property tax cap completely exempts pension contributions, and employee health benefits to boot. If that was the case in New York, the Empire State's "cap" would, in reality, be even looser.
At the California Democratic Party convention last weekend, the party adopted a resolution calling for undermining 1978's property-tax-limiting Proposition 13, which signifies a milestone. As the San Francisco Chronicle's Joe Garofoli noted here, it's now safe to touch the third rail of California politics. Prop. 13 has held sway among Republican and Democratic voters who don't want to see their property tax bills soar. Democrats, who have a supermajority in the Assembly and are likely to gain one in the Senate after a forthcoming Senate special election, are feeling emboldened. They are pushing for removal of Prop. 13 protections for commercial properties and for lower vote thresholds for parcel taxes. Many tax-raising measures are moving through the Capitol despite pledges that there would be no tax-raising frenzy. The unions are pushing these measures, which are better for them than reforming pensions. But the taxing-and-spending spree can't go on forever. Unfortunately, Democrats are about to see how long they can go on given that Republicans can now offer only token opposition.
A mental health agency in Kentucky that participates in the state's public employee pension plan is filing for bankruptcy after the state legislature passed pension reforms that would dramatically increase contributions into Kentucky's severely underfunded pension system. Seven Counties Services, a nonprofit, is shutting down its state pension system
for all employees and moving them into a defined-contribution 403(b) plan after Kentucky passed legislation that would have forced the nonprofit to spend 20 percent of its annual budget on pension costs. Although the situation is unusual because few non-government employers participate in public worker pension funds, Seven Counties predicament illustrates what happens when sharp increases in contribution levels to fix struggling pension systems hit an employer that simply can't turn to taxpayers to meet its increased costs.
The Sacramento Bee's columnist Dan Walters
argues that the Stockton bankruptcy decision is not a clear win for unions or the California Public Employees Retirement System (CalPERS). As he wrote, "But the details of Klein's ruling imply that the city and CalPERS may not prevail on the pension issue when he weighs the city's plan to deal with its debts - a plan that now excludes CalPERS as a creditor." Let's hope that Walters is right and that the first-blush conclusions that this is a big win for the unions is moderated by these other words. I can't imagine that the bankruptcy court will decide to take on CalPERS. As I read it. Judge Klein only wants an explanation from the city about why it is leaving CalPERS alone -- and it already has offered an explanation (that the city won't be able to recruit talent). I certainly hope the optimists are right.
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Wisconsin Shows What Ohio Can Gain from SB-5
Josh Barro, Nov 07, 2011
Improving Public Pension Transparency
Josh Barro, May 05, 2011
Pension Reform for Public Workers Outside Social Security
Josh Barro, Mar 29, 2011
A Reply to Dean Baker on Pension Panic
Josh Barro, Mar 07, 2011
Assessing states' pension reform proposals
Eileen Norcross, Feb 23, 2011
Illinois to Taxpayers: Drop Dead
Collin Hitt, Jan 18, 2011
Pension Promises, Real and Imagined
Josh Barro, Jan 02, 2011
New York's Exploding Pension Costs
E.J. McMahon and Josh Barro, Special Report 8-11, Empire Center, December 2010
Eight Things New Yorkers Should Know About Public Retirement Benefits in NYS
Citizens Budget Commission, October 2010
The Crisis in Local Government Pensions in the United States
Robert Novy-Marx and Joshua D. Rauh, Kellogg School of Management, Northwestern University, October 13, 2010
Unfunded Liabilities of State and Local Government Employees Retirement Plans
Courtney Collins and Andrew J. Rettenmaier, National Center for Policy, National Center for Policy Analysis, July 29, 2010
The Crisis in Public Sector Pension Plans: A Blueprint for Reform in New Jersey
Eileen Norcross and Andrew Biggs, Mercatus Center, June 23, 2010
Going For Broke: Reforming California's Public Employee Pension Systems
Stanford Institute for Economic Policy Research, April 2010
In The Danger Zone: A Comparative Analysis of New York State's Long-Term Obligations
Citizens Budget Commission, March 2010
more research on pensions >>
New Mayor Rahm Emanuel is tackling Chicago's budget
Josh Barro, Washington Examiner, 04-14-11 (This article is adapted from the spring issue of City Journal.)
Blame it on the pols
E.J. McMahon, New York Post, 04-11-11
Down to Earth Explosion in Pension Costs Can't be Averted without an Honest Look at Real Numbers
Josh Barro, Newsday, 02-20-11
Public vs. Private Retirements
Josh Barro, E. J. McMahon, New York Post, 12-19-10
This Bomb Just Stopped Ticking
Josh Barro, E. J. McMahon, New York Post, 12-08-10
The False Obstacles to Pension Reform
Josh Barro, RealClearMarkets.com, 10-05-10
New Jersey's Pension Misdeeds Are Real, But Not Unusual
Josh Barro, RealClearMarkets.com, 08-24-10
more articles on pensions >>
Steven Malanga interviews Collin Hitt of the Illinois Policy Institute about the failure of the Illinois legislature to tackle pension reform and their state's fiscal crisis.
Steven Malanga interviews Christian Schneider about his City Journal article and Governor Walker's successful strategies that made reform in Wisconsin possible.
Michael Allegretti interviews Rhode Island General Treasurer Gina Raimondo about her pension reforms and the successful strategies that made reform possible.
Nicole Gelinas talks with Josh Barro about public-sector workers and their retirement plans
Steven Malanga interviews Josh Barro about his PSI article, "Pension Promises, Real and Imagined."
more podcasts on pensions >>