NCPA - National Center for Policy Analysis

States Face Huge Unfunded Pension Liabilities

January 28, 2011

Most state and local governments currently use their own estimated rate of return on their investments to discount their liabilities.  By projecting unrealistically high rates of return, states minimize their unfunded liabilities, at least on paper.  Lower unfunded liabilities in turn allow them to reduce how much they and public employees must contribute to their pension funds.  Inflated investment assumptions are one reason that public pension funds are unfunded to the tune of $3.5 trillion, says the Wall Street Journal.

Local taxpayers are already seeing their services whacked and taxes raised to fill these pension holes.

  • University of California students will have to pay up to 8 percent more next year for tuition to offset an expected $500 million in state budget cuts.
  • Illinois residents will soon pay 67 percent more in income taxes.

In response, Republicans Devin Nunes and Darrell Issa of California, and Wisconsin's Paul Ryan have introduced the Public Employee Pension Transparency Act.

  • The bill would encourage governments to switch to defined-contribution plans by revealing the true magnitude of their unfunded liabilities.
  • States and municipalities would have to report their liabilities to the U.S. Treasury using their own rosy investment forecasts as well as a more realistic Treasury bond rate.

This data would make clear how much taxpayers potentially owe and increase pressure on lawmakers to fix their plans, says the Journal.

Source: "Public Pension Hygiene Act," Wall Street Journal, January 22, 2011.

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