P(h)EW, that wasn’t so bad

The PEW Center on the States released a study today entitled: The Widening Gap: The Great Recession’s Impact on State Pension and Retiree Health Care Costs which put that gap at $1.26 trillion as compared to $1 trillion in last year’s study while providing a convenient rationale for the increase that they term the ‘Great Recession’.  The real reason: the Great Lie.

The second sentence on page 2 says it all:

“The $1.26 trillion figure is based on states’ own actuarial assumptions.”

Those assumptions were legislated by politicians to actuaries who understand what numbers their clients want to see…..low, and that’s what they, and the public, get.

Using those assumptions the shortfall for pensions comes to $660 billion.  Use 30-year treasury rates and it’s $2.4 trillion.  But there’s more.

The states are also using their own asset values.  Because of a concept called ‘asset smoothing’ where you get to pretend that your fund consists of the ‘average’ of what it had over the last five years instead of what it actually has New Jersey, for example, is reporting that they have $90 billion in their fund when the real value has been hovering around $70 billion (depending on what number they want to assign to their ‘alternative’ investments).  This concept is useful in the private sector where companies need to have predictable expense items for pensions since they are working within IRS regulations but in the public sector there already exists a very effective smoothing method.

For retiree health care the gap is reported to be $604 billion ($67 billion of which belongs to New Jersey) but there the guesses are even wilder because there is almost no money being set aside for these liabilities.  New Jersey, for example again, supposedly pays out $1.33 billion annually for retiree health care.  In ten years they may be paying out $2 billion as more retirees become eligible and the cost of insurance rises.  But the state is putting away $0 toward that liability so whatever interest rate you want to use you are applying it to $0 with the only possible adjustment being for the time value of money.  Theoretically, the real actuarial value of this benefit could be ∞.

Though the PEW report is bite-sized for easy media consumption New Jersey does get singled out in the text:

Just as failing to meet a monthly payment on a personal loan can result in higher payments down the road, a state’s failure to pay the annual bill for retirement benefits can mean it will have to pay more in the future. A comparison of New York and New Jersey provides a good example. Both states had fully funded pension plans in 2002. In subsequent years, the Garden State failed to make more than 60 percent of its annual contribution in each year and its funding gap grew to $46 billion.
The Empire State, on the other hand, continued to be disciplined about funding its annual bill. Today, New York has a $147 billion liability, compared to New Jersey’s $135 billion obligation, but its annual required contribution is $1.6 billion less. To put this in context, consider that New York increased K-12 education spending by $1.7 billion from fiscal year 2008 to 2009. New Jersey, meanwhile, reduced state education spending by $557 million during the same period.

That’s right, New Jersey has staked out a central role in the national debate over retiree benefits and fiscal prudence………….as a warning to others.

9 responses to this post.

  1. Posted by javagold on April 26, 2011 at 9:50 am

    since health benefits are not protected, START and make the public leeches pay 100% of the $70 billion in health liabilities


  2. Posted by brooklyn91941 on April 26, 2011 at 2:31 pm

    There seems to be the beginning of what be a long term war of Public Pensions. Clearly they have been mismanaged for years. The State has been grossly neglegent by not putting its proper contribution in. The healthcare side is even worse because the state put no money in. We all knew that the day of reckoning was coming and chose to ignore it and let the politicians off the hook.

    Well, we the citizens will have to decide what type of society we want and are willing to pay for? It looks like we are going back to lords and serfs. I am not against the concept of defined contribution plans if the sponsor fully discloses all of the fees, and provides education to the participants.

    Most people are incapable in managing their own money. I think a better long term solution is to provide defined benefit plans with smaller benefits. They were not designed to provide retirees with their current income for life. If some compromise is not reached, get your pitchforks and torches.


  3. Posted by Larry Littlefield on April 26, 2011 at 9:30 pm

    Just remember, when considering New York, the separate NYC pension system is almost as big as the state system, and almost as underfunded as New Jersey. Despite the highest taxpayer contributions anywhere. For reasons I don’t understand.

    And we still paying for Mayor Lindsay, after having not caught up to his pension deals for 40 years?


    • Posted by Tough Love on April 27, 2011 at 1:51 am

      High contributions (by the employees) are no match for uncontrolled benefits …. especially when NYS approves the benefits but NYC has to pay for them.

      Only Public Sector Unions (who buy off the elected officials with campaign contributions and election support) could get away with this.


  4. Posted by Sam on April 30, 2011 at 9:40 am

    Do you know how to analyze governments’ Comprehensive Annual Financial Reports (CAFR)? If so, you will find that virtually every governmental entity in the US is hoarding cash that could be used to close budget gaps and pay pensions with plenty left over. The whole “government is broke” song is a scam designed to make us accept higher taxes. Prove me wrong, please.


    • I can’t prove you wrong since, from what I’ve seen on the county level in New Jersey, you’re right. They’re all (outside of Middlesex maybe) keeping back non-budget revenue and inflating appropriations so they get back more tax money to hoard again.

      However, where you are wrong, from what I’ve seen, is in how much is involved – hardly enough to take care of the mountains of debt they’ve built up. In Union County, they’re holding back maybe $18 million but there total debt including unfunded pensions and health care plus regular bonding debt would be in the $1 billion range.


  5. […] US: Independent study shows that states use deceptive accounting to conceal budget shortfalls that … BuryPensions 2011 Apr 26 (Cached) […]


  6. that’s good, thanks for sharing,.. I think this is great blog


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