What’s True of Public Pensions is also True of Public Retiree Health Programs
While Americans are typically earning less than 1 percent interest on their savings accounts and watching their 401(k) balances yo-yo along with the stock market, most public pension funds are still betting they will earn annual returns of 7 to 8 percent over the long haul, a practice that Mayor Michael R. Bloomberg recently called “indefensible.”
Now public pension funds across the country are facing a painful reckoning. Their projections look increasingly out of touch in today’s low-interest environment, and pressure is mounting to be more realistic. But lowering their investment assumptions, even slightly, means turning for more cash to local taxpayers — who pay part of the cost of public pensions through property and other taxes.
In New York, the city’s chief actuary, Robert North, has proposed lowering the assumed rate of return for the city’s five pension funds to 7 percent from 8 percent, which would be one of the sharpest reductions by a public pension fund in the United States. But that change would mean finding an additional $1.9 billion for the pension system every year, a huge amount for a city already depositing more than a tenth of its budget — $7.3 billion a year — into the funds.
Read more at the NY Times.
Public employees and their unions are fond of justifying generous retirement benefits because their pay is supposedly lower than the private sector. I don’t begrudge public employees the right to trade take-home pay today for retiree pay at some point in the future. However, I do not believe that public sector wages are not necessarily lower than comparable private sector jobs. Moreover, the retirement benefits are often far more lucrative than private sector retirement plans. Public employees should not be allowed to game the system, where some work 80-hour weeks for the last three years prior to retirement so their retirement is based on inflated wages.
If they do lower the rate of return on the pension funds, it probably won’t be the last time.
I am concerned about the federal pensions.
About a year ago, they were listed as a $5 trillion liability on the balance sheet.
Recently, the FASAB (the accounting advisor for the federal government)came out with its Statement of Federal Financial Accounting Standards 43.
No longer are federal pensions seen as earmarked funds or dedicated collections.
Dedicated collections are specific funds raised at least from one non-federal source that are targeted for specific beneficiaries.
Page 9 “Funds excluded
Certain categories of funds are excluded from the reporting requirements of this standard.
Intragovernmental funds are excluded (for example, the loans from the Social Security trust fund to the Treasury, my words) because they are revolving funds that conduct business primarily within and between government agencies. Funds established to account for pensions, other retirement benefits,other postemployment benefits, and other employee benefits provided to federal employees should not be classified as funds from dedicated collections because such funds account for employer-employee transactions and requirements tailored to those transactions are provided by SFFAS 5, Accounting for
Liabilities of the Federal Government. In addition, because these funds recognize significant long-term liabilities, the large negative net position offsets much of the generally positive net position of other funds from dedicated collections. The result at the government-wide level is that the large negative net position of these funds obscures the large cumulative amount that needs to be repaid by the general fund in order for the dedicated collections to be used for their intended purposes.”
http://www.fasab.gov/pdffiles/handbook_sffas_43.pdf.
Don Levit
We may be looking at a public pension crisis down the road.