Debt: Yes, Puerto Rico is broke, and has declared the equivalent of bankruptcy in a federal court. But U.S. states, cities and counties have no reason to feel superior. They, too, are nearly insolvent, running deficits as soaring pension costs threaten the nation's fiscal health, a new report says.
The study by Hoover Institution Senior Fellow Joshua Rauh, "Hidden Debt, Hidden Deficits," is an update of a report issued last year. It should sound an alarm across the U.S. about the growing crisis of underfunded pensions at the state and local level. Instead, sadly, it will likely be ignored.
To put it bluntly, America's pension systems are being mismanaged, which is hitting state and local budgets hard.
The Hoover study looked at 649 pension systems as of 2015. What it found was alarming. The average investment return for pensions was 2.87% for the year, while the discount rate — essentially, the expected investment return — was 7.36%. That means returns are 61% below expectations, a dismal performance to say the least.
This means that pension systems across the U.S. will have to do one of two things: Find more money to fund the expected payouts, or slash pension spending on future retirees — or some combination of the two. None of the choices is appealing.
Meanwhile these pension gaps pose a major threat to state and local fiscal health.
"While state and local governments across the U.S. largely claimed they ran balanced budgets, in fact, they ran deficits though their pension systems of $167 billion," Rauh noted. "This deficit equals 18.2% of all state and local government tax revenue. ... The deficits are large and the study reveals the fact that state and local government budgets are far from balanced when one considers pension promises."
Looked at in the long term, the numbers are even more frightening. The 2017 report says that unfunded pension liabilities — that is, money owed to retirees without investments to back them up — now stand at $3.85 trillion, $434 billion more than a year ago.
Still more alarming, because of the peculiarities of government pension accounting, only $1.38 trillion of the liabilities are recognized on state and local governments' books. Rauh says the rest make up the "hidden deficits" of the study's title.
Pretending that you'll show returns of 7% to 8% — when recent experience suggests your actual performance is less than half that — goes beyond mere incompetence; it's bordering on fiscal malfeasance.
Nor is the Hoover study an outlier. If anything, it uses the most conservative accounting possible.
Last fall, a separate study by the American Legislative Exchange Council using somewhat different criteria estimated the unfunded pension liability of states and local governments at $5.6 trillion — or roughly $17,427 for every man, woman and child in America. You might not think you owe it, but you do.
Still another by the credit-rating agency Moody's found a $7 trillion pension hole that needs to be fixed. No matter how you calculate it, it's huge.
Fixing the problem starts with honesty. As long as public pension and state and local budget officials can lie about what they truly owe, Americans can't possibly understand the financial threat posed by the exploding pension crisis.
Honesty begins with marking pension portfolios to their actual market values, so that overseers and the public know just how underfunded they really are. Then real reforms can be made, starting with cutting back on lavish pension promises to already-overpaid public workers, while encouraging public-sector workers to do more of the actual saving for their retirements than they now do.
After all, private workers now fund their own retirements. Why shouldn't government workers too?