Last week, the Pew Center on the States released its “Widening Gap Update,” which analyzed the massive unfunded pension deficit occurring on local and state governments. According to Pew, the funding gap for U.S. state public employee retirement benefits (pensions and retiree health care) climbed by $120 billion to $1.38 trillion in fiscal 2010. However, many experts, including State Budget Solutions, know that Pew’s estimate is way off — more than $3 trillion off to be exact.
In reality, state governments have a combined debt of more than $4 trillion, just for underfunded public employee pension funds. This problem is so dire for many cities, counties and school districts that they are being forced to cut into funding for vital services and threaten citizens with higher taxes. Public employees themselves face the prospect of massive layoffs brought about by the unsustainable promises once made by irresponsible politicians.
Pew acknowledges that its report uses states’ own actuarial assumptions about how much money they expect the pension fund to earn, on average, on investments now and in the future. The most dangerous deception in the Pew report is the failure to not recognize that public pension funds are putting more taxpayer and worker money into riskier investments at the very time they should be reducing risk as their employees age. That is just setting taxpayers up for a bigger catastrophe in the future.
One of the most insidious aspects of pension liability is its stealth nature. Pension obligations don’t appear on state balance sheets. As such, states with billions in unfunded pension liabilities may technically brag of “balanced” budgets despite being swamped by pension debt. For example, Arkansas claimed a balanced budget last year but had at least $2 billion in unfunded pension liabilities. Indeed, the unfunded pension promises in most states dwarf the total outstanding debt, tax revenues and spending.
Complicating the issue even further is the difficulty in deciphering and understanding pension liability. As is often at the root of government transparency problems, states have devised special accounting rules that are inconsistent with the private sector and that hide the problem. As a result, the true size of pension liabilities is often understated.
Pew’s study also fails to acknowledge that all public pension systems will eventually run out of money to pay benefits unless fundamental reforms are undertaken now.
Taxpayers in Wisconsin — which Pew cites as 100 percent funded — still will have to pay more than $1,500 in additional taxes every year for 30 years just to fulfill existing pension promises. Every day that passes without pension reform in Wisconsin just increases that debt.
It is vital that pension reform occur now, and it must be based on actual numbers instead of Pew’s optimistic outlook. Elected officials need to understand the full scope of our nation’s pension crisis so they can begin to implement policies that will protect taxpayers and public workers.
Bob Williams, president of State Budget Solutions, is a former Washington state legislator, gubernatorial candidate and auditor with the Government Accountability Office.
