LEGISLATIVE REPORT: Will governments raise taxes, spend less to pay pensions?


Michael Karsch, Legislative Representative

By Michael Karsch
Legislative Representative

Bloomberg reported at the end of September that the Federal Reserve’s Quarterly Financial Accounts include a change to accounting for state and local pension-fund programs. For unfunded liabilities the report changed the way of measuring such liabilities from the prior “accumulated benefit obligation” to a “projected benefit obligation.” This means, according to the Bloomberg article, that the unfunded liability increases to a nationwide figure of $2.3 trillion, more than double the previous total, the result being akin to dropping a “bomb.”

Stephanie Pomboy, a researcher for MacroMavens LLC, says this means cutting spending or raising taxes to make up this debt. In “Fullerton Watch” in September, David Crane claims that the Feds revised its measure of liabilities by state and local governments to $4.1 trillion. So we have two resources who are widely divergent on the same subject – $2.3 trillion vs. $4.1 trillion!

The “City Journal” on Oct. 21 released a report entitled “The Ticking Pension Bomb” that noted governments across the country have increased annual pension contributions by 90 percent to pay down the unfunded liability, but that most state pension funds were only 70 percent funded, down from 87 percent in 2007. The video listed the states in the “worst condition” as California, Connecticut, Illinois and New Jersey. This appears to be focused only on the state pension funds, not including independent city funds.

These depressing debt holes have been a standard story in the pension news for several years. The opposite side of the argument is that governments do have tremendous “deep pockets,” and a dependable life span that seldom faces bankruptcy. Only a few cities have fallen that far. The reason, as argued by viewpoints from the Haas Institute in Berkeley, is that accounting for paybacks to current liabilities can be done with projections into the future, like 15- or 20-year cycles. It is true that demographics are another serious factor, the aging population growing larger and larger, and Retirees living longer and longer. Forecasting what is to come and to set aside by financial policy for those expenses in the future is a first step in keeping the pension systems afloat.