Promises, Promises
According to Joshua Rauh of the Kellogg School of Management at Northwestern…if the unfinanced portion of all public pension obligations were converted to debt, total state indebtedness would soar from $1 trillion to $4.3 trillion.
Such an explosion of debt would threaten desperate governments with bankruptcy. Alternately, states could try to defray pension costs from their operating budgets. Illinois, once its funds were depleted, would be forced to devote a third of its budget to retirees; Ohio, fully half. This would impoverish every social (and other) program; it would invert the basic mission of government, which is, after all, to serve constituents’ needs.
Full article by Roger Lowenstein in The New York Times Magazine.
I think this is going to be a huge problem.
I agree with Joe. I think we are going to see quite a few cities declare bankruptcy in the next few years.
Hopefully cities and states will be a little more conservative in their planning after all of this blows over.
I wonder if the “too big to fail” doctrine applies to the United States. If so, will the IMF or World Bank come and bail us out? And who will bail them out?
State and local governments are having the same prolems as the federal government: politicians making promises they were unwilling to pay for at the time they made them.
Proving, I suppose, that democracies don’t work very well.
In Rauh’s paper entitled “Are State Public Pensions Sustainable”? on page 5 it states, “(Public pension disclosures)present a value measure of the cash flows under a discount rate chosen by the states to conform with Government Accounting Standards rule 25. This rule stipulates that states should discount pension obligations at an expected rate of return on pension plan assets. The fundamental problem is that the present value of the liability under this rule depends on the assets the states choose to fund the liability. The riskier the assets the states choose, the higher expected rate of return the assets would have and the smaller the liability would appear. This ignores the fact that riskier assets also have a wider distribution of outcomes and therefore ignores risk completely.”
Don Levit
The public pension train wreck is running into the perfect storm of an unsustainable national debt and unfunded liabilities derived from elderly entitlements (i.e. Social Security and Medicare).
Twenty to thirty years from now, the public will be crushed under an enormous burden from promises made, and benefits conveyed to favored constituents decades earlier.
Devon:
I agree with you wholeheartedly, which is very unfortunate.
It is interesting that the states consider pensions for their employees as real liabilities.
Unfortunately, the same cannot be said for citizens when it comes to Social Security and Medicare.
Their only liability is the current year’s “promise.”
Another way to see how the states value their pension liabilities is through their accounting advisor, the GASB.
In a paper entitled “Why Government Accounting and Financial Reporting Is – And Should Be – Different”
Page 8 “In contrast (to business enterprises), the ability of governments to exist in the future generally is not in doubt.”
Page 19 “Provisions for municipal bankruptcy provide for reorganization, but not liquidation of municipalities. Liquidation can be invoked only at the discretion of municipalities, not by creditors. Because governments have the power to tax – a right in perpetuity – they have the ability to continue operating in perpetuity.”
Wow, Devon, if they can function forever, what are we so worried about?
Go to gasb.org. Put in “White Papers.”
Don Levit