State pension obligations


There was an article in Saturday’s NYT entitled “In Budget Crisis States Take Aim at Pension Costs“.  It quotes a pension expert who finds that states like Connecticut, Illinois, Indiana and New Jersey are less than 10 years from exhausting their pension funds.

However, as the article says “…paying public pensions straight out of general revenue would be ruinous. In Illinois’s case, it would consume about half the state’s cash every year, bringing other vital state services to a standstill.”

That reminds me of a widely circulated remark by David Crane, a Democrat who is the top pension adviser to California Gov. Arnold Schwarzenegger: “One cannot be both a progressive and be opposed to pension reform.  The math is irrefutable that the losers from excessive and unfunded pensions are precisely the programs progressive Democrats tend to applaud. Those programs are being driven out of existence by rising pension costs.”

Crane’s comment was mostly picked up by conservative commentators, but that doesn’t diminish its truth.

Massachusetts is not mentioned in the NYT article, but a recent report from the Pew Center on the States entitled “The Trillion Dollar Gap: Underfunded State Retirement Systems and the Road to Reform” does not give our state very good grades.  Massachusetts was one of 19 states in the worst category (“Meriting Serious Concern”) for adequacy of pension funding, with only 63% of accrued liabilities funded.  Massachusetts is similarly is in the lowest category (with 41 other states) for retiree health care funding, with 1.8% of retiree health care and other non-pension obligations funded.  Amazingly, states only had to start recognizing these non-pension obligations in 2006.

The report notes that the staggering deficits reflect states’ lack of discipline during the fat years, including failing to make payments for pension systems at the levels recommended by their own actuaries; expanding benefits and offering cost-of-living increases without fully considering their long-term cost or how to pay for them; and providing retiree health care without adequately funding it

I realize that the legislature has just passed important pension reforms, but I believe those reforms addressed overly generous pension rules, not the solvency of the system.

I realize no Democrat is going to win a popularity contest leading on this issue … but we are at a stage where if we don’t address these problems aggressively now the alternatives will be much worse – and the burden less fairly shared – in the future.


4 replies on “State pension obligations”

  1. Thanks, Vince, very much for speaking out on this issue!

    I absolutely agree. As you say, we’ve made some progress in this session, but I am among those pushing for deeper reforms that would help bring our liabilities in line with our resources over time.

    And I am talking about on the campaign trail too — I think it is important for all voters to understand this issue.

  2. Vince, you are out in front of the biggest issue of the next decade. Bigger than energy or terrorism IMO. I have renewed respect for the NYT printing that piece as it rather starkly observes that the paper’s own progressive agenda is unsustainable. I think we also owe Greece a tip-of-the-hat for showing us what happens when governments wait too long to recognize the promise of expansive government services with low taxes that got them elected leads to bankruptcy. But even with Greece providing a shining beacon of irresponsibility, we have the headline today from Beacon Hill that public employee unions failed to see reason with legislators negotiating for healthcare expense reductions for cities and towns.

    What I foresee as most likely is a massive devaluing of the dollar as the US Treasury steps in, cranks up the printing press, and bails out the states as their pension obligations drive them to insolvency in five years or so. Meanwhile, I am moving some assets into gold.

    On the bright side, I am looking forward to a ballot initiative (the likely next step) that addresses the city and town employee healthcare issue. Public employee unions think the legislators they were talking to were unreasonable – wait till they hear directly from the taxpayers. This is going to get ugly, and the sooner the better.

  3. There is another good article about state and local pensions in yesterday’s NYT. The new article describes the deliberations of the Governmental Accounting Standards Board (GASB), a private, non-governmental expert group that prescribes best practices for financial reporting by state and local governments. The GASB is considering recommending that full pension liabilities appear on the balance sheet, not hidden away in footnotes as is the current practice. They are also considering requiring that states and localities make more conservative assumptions about future rates of return on pension assets. Currently most Massachusetts plans assume annual returns around 8% – which was exceeded during the bull market years of the 1980s and 1990s. However, it is unclear whether such returns can be achieved in the coming years.

    article link:

    1. Yes. Thanks, Vince.

      Many investors believe that we are in to an era of a “new normal” — where equity returns will be well below the 8, 9 or 10% they historically have averaged, perhaps as low as 4%. Pension fund investment committees are very reluctant to address this possibility. Lowering the assumptions about future returns even a little, like from 8.25% to 8% greatly increases the amount that governments expect to contribute.

      The politics of greatly increasing the pension contribution (or cutting benefits) are unimaginably difficult — in fact, practically impossible. My impression is that many in the pension establishment here in this state are in total denial on this. It is much easier to hope that the future of investing will look like the past of investing, even when the last two years have taught us that financial history, however consistent, is never a reliable predictor of the future.

      It is superficial thinking to look at past returns as a predictor of the future. Ultimately, investment returns reflect the economy and many deep thinkers believe the developed countries (the bulk of the world economy) will be in a slow growth mode for many years. Those who would like to continue to hold on to our current assumptions have to justify their preferences not with reference to the statistics of prior returns but with a case for growth in the economy. Most people defending the current set of assumptions aren’t making that kind of case.

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