GAO Report Buries Ugly Truth About Doomed Public Pension Plans

Photo: Emily Metcalf
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Photo: Emily Metcalf

BY FRANK KEEGAN FOR STATE BUDGET SOLUTIONS – Read beyond Page 1 in the most recent study of our municipal and state pension crisis and find the chilling truths that prove it is only a matter of time before those funds cannot pay promised benefits. When that happens — sooner for some, later for others, but inevitably for all  — billions of dollars every year must come from services, taxpayers, bondholders and beneficiaries.

The Government Accountability Office buries the scariest truths found in its sampling of 3,400 state and municipal pension systems for 27 million workers and retirees, with a closer look at 16 state and city plans.

Most discouraging is the fact that despite desperate recent reform efforts, public defined-benefit pension plans ultimately are doomed unless we pump trillions more dollars into them, and even that emptying of public coffers is endangered by reckless shortsighted policies of politicians and fund managers.
The report makes clear our public policy question is not if defined benefit pension plans run out of money. The only question is when these supposedly perpetual sources of secure retirement for dedicated public employees will run out of money.
GAO-12-322, “State and Local Government Pension Plans: Economic Downturn Spurs Efforts to Address Costs and Sustainability,” is a good summary of official information about an occult government fiscal crisis big enough to bankrupt America.
Unfortunately, all the official information is a lie within a deception fabricated from pure delusion.
GAO points out delusion No. 1 on Page 34 of the 54-page report in summing up recent attempts at reform:
“Despite these efforts, continued vigilance is needed to help ensure that states and localities can continue to meet their pension obligations. Several factors will ultimately affect the sustainability of state and local pension plans over the long term. Important among them are whether government sponsors maintain adequate contributions toward these plans, and whether investment returns meet sponsors’ long-term assumptions. Going forward, growing budget pressures will continue to challenge state and local governments’ abilities to provide adequate contributions to help sustain their pension plans and ensure a secure retirement for current and future employees.”
GAO does acknowledge the reality that politicians have not, are not and most probably never will “provide adequate contributions.”
The hard reality is, according to GAO, “To address rising actuarially required pension contribution levels and budget pressures, some states and localities have taken actions to limit employer contributions in the short term or refinance their contributions. These strategies included changing actuarial methods or issuing pension bonds to supplement other sources of financing for pension plans. Such strategies help plan sponsors manage their contributions in the near term, but may increase their future costs.”
Those pension obligations bonds not only indenture future taxpayers and public workers who will get no benefits of any kind from them, they let politicians off the hook now for cheating pensions.
According to GAO: “These transactions involve significant risks for government entities because investment returns on the bond proceeds can be volatile and lower than the interest rate on the bonds. In these cases, POBs can leave plan sponsors worse off than they were before, juggling debt service payments on the POBs in addition to their annual pension contributions. In a recent brief, the Center for State and Local Government Excellence reported that by mid-2009, most POBs issued since 1992 were a net drain on government revenues.”
Among the few governments inflicting POBs on taxpayers recently, the dystopian state of Illinois actually used pension obligation bonds and false reforms to make the catastrophe a lot worse:
“… the state took advanced credit for these future benefit reductions, further reducing contributions in the short term. According to plan actuaries, by taking this advance credit, the state also increased unfunded liabilities in the short term, adversely affecting its retirement systems.”
But the heart of delusion is in a footnote on Page 26: “We have previously reported that state and local plans have gradually changed their asset portfolios over many years by increasing their allocations in higher-risk investments partly in pursuit of higher returns.”
High-risk investments mean state and local politicians put less money into pension plans now because they claim big future returns  — generally assumed to be 8 percent a year every year without another market crash ever  — will pay promised benefits.
That is self-evidently false. After a decade in which their risky investment strategies collided with reality in the dot-com bust and Great Recession, pension fund managers have to get at least 8.9 percent a year every year for the next 30 years just to achieve an 8 percent discount rate. Even if that miracle happens, somebody — workers, taxpayers, bondholders and service recipients — must take trillions of dollars in hits every year through at least 2042 just to pay pension benefits.
The harder reality now is that because of the Federal Reserve Bank’s repression policy holding 30-year risk-free returns at about 3 percent, risky investments in pension portfolios have to get even riskier.
That just sets us up for a bigger crash the next time markets drop.
According to the latest full fiscal year data from the U.S. Census, state pension funds blew $1.46 for every dollar in contributions and investment earnings between 2007 and 2010.
Funds are going deeper into debt and taking bigger risks in a desperate scramble to delay the inevitable collapse.
GAO admits none of the reforms will have significant impact on the existing debt for state and municipal retirement benefits. That is estimated at $1.26 trillion if you believe there never will be another market downturn and politicians will start making full contributions to pay down the debt and fund earned benefits every year.
Neither of those phenomena has occurred ever in human history.
If you don’t believe that, the unfunded liability is more than $4 trillion, plus another trillion in false health-care promises, and growing fast.
Now is the time to admit reality and deal with an exploding public policy disaster that  — even accepting official lies and delusions  — can bankrupt our nation.
Public workers, taxpayers and honest politicians must act this year to freeze state and municipal defined benefit pension plans, begin paying down the debt and shifting to a sustainable system.
This is an issue of real numbers, not politics. Waiting for the next market crash to prove it will be too late. Then all public pension plans will pass a fiscal event horizon beyond any capacity to earn, tax or cut our way out of eternal debt.
Then inexorably, whether in a decade or five decades, the pension checks must stop coming.