Pension systems in the Washington region are at risk of devastating fiscal peril, as investment managers for government retirement systems bank on rosy returns in an unpredictable market to pay off ballooning costs.

State and local governments around the Potomac River forecast a nearly 8 percent return on investments this year, even as most private employers calculate gains about half as optimistic.

In Fairfax and Montgomery counties, for example, pension managers assume returns of 7.5 percent in the future, while Maryland expects gains of 7.75 percent. Virginia’s assumed rate of return was adjusted to 7 percent in 2010, but still remains well above general economic forecasts.

Area pension systems by the numbers
Fairfax County
Unfunded liabilities: $1.75 billion
Assumed rate of return on investments: 7.5 percent
Average annual return, 2000-2010: 4 percent
Unfunded liabilities: $23.95 billion
Assumed rate of return on investments: 7 percent
Average annual return, 2000-2010: 5.8 percent
Montgomery County
Unfunded liabilities: $875 million
Assumed rate of return on investments: 7.5 percent
Average annual return, 2000-2010: 3.78 percent
Unfunded liabilities: $19.7 billion
Assumed rate of return on investments: 7.75 percent
Average annual return, 2000-2010: 4.05 percent

A growing chorus of economists say those estimates are divorced from reality as investments have stagnated — or nose-dived in some cases — after post-recession shifts in the stock market. 

“These expectations are in no way realistic. This is known, this is no secret,” said Anirban Basu, chairman and CEO at Baltimore’s Sage Policy Group. “One might question why adjustments aren’t being made when projections are clearly not sustainable. The answer is, doing so would reveal significant funding gaps.”

Added Daraius Irani, an economist at Towson University, “The average taxpayer should be very concerned. To finance these obligations, it will either come from increased taxes or decreased services. The decision to award lucrative pension plans is a great political tool, but at the end of the day, the bill comes due.”

Lawmakers nationwide are struggling to pay retirement obligations for employees who are living longer and reporting more disabilities.

Though governors in both Maryland and Virginia recently increased employee contributions to pension plans, among other changes, both states face staggering shortfalls in their retirement systems. 

Maryland and Virginia are facing unfunded liabilities of about $20 billion, data show. And if the expected rate of return were further reduced to levels consistent with market expectations, it would add billions of dollars to those gaps.

To make those payments, both states would need at least a half-decade of double-digit investment returns to draw pension funding in line with fiscal realities — a prospect that analysts dismiss as unrealistic.

As such, state leaders are calling for more changes to their beleaguered pension plans.

“While the administration has made significant reforms thus far, there is still additional work to be done to address remaining unfunded liabilities in the Virginia Retirement System so that the governor can look state employees in the eye and assure them that their retirement nest eggs will be there when they leave public service,” conceded Jeff Caldwell, a spokesman for Republican Gov. Bob McDonnell.

Basu said Maryland’s pension woes are worse than Virginia’s, which would likely force officials to raise taxes without significant reforms. He said if state leaders instituted a 401(k)-style arrangement — private companies are flocking to such systems to save money — they would be far more protected from the types of economic woes that have wreaked havoc on budgets in recent years.

Despite the stark financial picture, pension officials said they were comfortable with current projections.

“I certainly respect those people [with concerns about investment returns],” said Robert Mears, executive director of Fairfax County’s retirement system. “But we think that 7.5 percent is realistic. We have confidence in that return. Where I’ve seen the majority of reductions has been those funds working with 8.5 and 9 percent.”

During the past decade, the average return has been 5.7 percent, according to the National Association of State Retirement Administrators.

Both Virginia and Maryland had a roughly 20 percent return on pension investments last fiscal year. However, those sizable gains came after years of historic losses. 

According to analysts, concerns over the federal deficit and a debt crisis engulfing Europe also make it unlikely that state pension funds will see anything like the growth needed to meet lofty expectations.