The Public Employee Pension Mess

Continuing her fine reporting on pension issues, Mary Williams Walsh turns her attention to state and local government pensions in "Public Pension Plans Face Billions in Shortages" in today's New York Times. In a nutshell, the accounting standards are even more lax with public plans than with corporate plans, and there actually seem to be laws that bar oversight entities from blowing the whistle on bad practices. The size of the problem is staggering:

It is hard to know the extent of the problems, because there is no central regulator to gather data on public plans. Nor is the accounting for government pension plans uniform, so comparing one with another can be unreliable.

But by one estimate, state and local governments owe their current and future retirees roughly $375 billion more than they have committed to their pension funds.

And that may well understate the gap: Barclays Global Investments has calculated that if America’s state pension plans were required to use the same methods as corporations, the total value of the benefits they have promised would grow 22 percent, to $2.5 trillion. Only $1.7 trillion has been set aside to pay those benefits.

So this may be an $800 billion problem, compared to the $450 billion problem in the corporate sector. Lovely. And how did we get this way? Here's one method, favored by those in the Garden State:

Still, officials in Trenton have been shortchanging New Jersey’s pension fund for years, much as San Diego did. From 1998 to 2005, the state overrode its actuary’s instructions to put a total of $652 million into the fund for state employees. Instead, it provided a little less than $1 million. Funds for judges, teachers, police officers and other workers got less, too.

To make up the missing money, New Jersey officials tried an approach similar to one used in San Diego. They said they would capture the “excess” gains they expected the pension funds’ investments to make and use them as contributions.

Clever. Too bad Enron isn't around to hire these officials. Another culprit has been (absurdly) long funding schedules, which serve to reduce the required contribution in each year:

Illinois officials say the state’s 50-year schedule is actually an improvement; before adopting it in 1995, the state had no funding schedule at all. In Colorado’s most recent legislative session, lawmakers enacted pension changes that they hope will make the plan solvent in 45 years.

And the National Association of State Retirement Administrators says it is unrealistic to expect all public plans to be fully funded, because they do not have to pay all the benefits they owe at once.

I'm guessing there's no financial literacy requirement to be a spokesperson for NASRA.

Wishing won't make this problem go away. At some point, state and local taxes go up or benefits to public employees or retirees get cut. There is no ERISA coverage for these plans, so I presume that attempts to cut benefits will wind up in court.