As Taxpayers–either Income, Sales, License Fees, etc.–we should all be aware of our respective state’s hidden time bombs. When it comes to roads, bridges and other Infrastructure details, we can generally notice the potholes, mass transit taken out of service, bridges in disrepair, etc.. But, we do not see is how well the State (and Local) governments have set money aside for current and future Retiree Pensions.
The linked article, “Ratings Service Moody’s Finds Pension Shortfall”, somewhat sounds the alarm, at least for some states, as to how current they are in their pension responsibilities, http://dealbook.nytimes.com/2013/06/27/moodys-shows-wider-pension-gap-for-states/nl=business&emc=edit_dlbkpm_20130627&_r=0&pagewanted=print.
As the article notes, Moody’s Investors’ Service is concerned by the divergence between the 48 cents on every Dollar promised (to be paid-out), by the 50 states in aggregate, and the 74 cents that they are reporting. Remember that Moody’s, along with S & P and Fitch, are the major credit rating agencies that review the debt of State and Local Government Bonds. In other words, the states’ aggreagate resources set aside is only roughly 65% of their estimated long-term payment r3sponsibilities.
As it turns out, Illinois is the worse case with an Unfunded Pension Liability that is three times the total of all Taxes and Fees that the state takes in each year, on average. Nebraska, on the other hand, is only seven percent underfunded–primarily because it does not pay much in Pension Benefits.
Obviously, some states will be funded at lesser amounts than the average, and some will be at greater amounts. Unfortunately, I believe that the reporter (for the linked article) missed-the-boat by not including a chart with the Moody’s ratings, on a state-by-state basis. I had Emailed the State of Florida to get a report of what its “Pension Gap” (the shortfall in what is owed, and what it has reserved for Pensions) is so that I can review the methodology. If you are not numbers-oriented, you might consider passing a copy of the article on to your local newspaper to investigate. I’m sure that your Community would like to know, don’t you?
Generally, governments err either by not reserving the amount that their projections predict should be needed, or they base their funding on irrational assumptions. I am not an expert on Municipal Finance; however, Florida has generally funded its pensions reasonably well over the years, and currently claims to be 86.9% funded. Also, I believe that projections of: 7.75% Average Investment Earnings (Income and Growth); General Wage Growth of 4.00%; Post-Retirement Benefit Increase 3.00% and Growth of Membership 0.00% fair. To me, these are quite valid and achievable assumptions.
Some Retirement Plans project extremely high, perhaps unahievable, Investment Earning Growth and use decades old actuarial tables ( with shorter life expectancies) and, accordingly, fall deeper into the Pension Gap. There is a reason, however, as to why some politicians might not take their Pension Liabilities seriously, albeit a short-sighted one. Remember that Pensions run over a lengthy (perhaps 20 to 30 years) period–both for the Accumulation Phase (of amounts paid-in), and the Distribution Phase (of benefits paid-out). So, over such extended periods, the politicians are normally out of office before the chickens come home to roost.