Rauh Update

Joshua D. Rauh of the Hoover Institution released his second annual report studying 649 public pension systems and here are some excerpts of note:

What is in fact going on is that the governments are borrowing from workers and promising to repay that debt when they retire, but the accounting standards allow the bulk of this debt to go unreported through the assumption of high rates of return. (page 2)

From an ex ante perspective, the true annual cost of keeping pension liabilities from rising is therefore $288.7 billion (=$111.1+$178.6). This amounts to 12.7 percent of all state and local
government general revenue from own sources, including that of governments that do not themselves sponsor pension plans, before any attempt to pay down unfunded liabilities. That annual cost for just fiscal year 2015 is equal to 18.2 percent of all state and local tax revenue. (page 3)

Under market value standards, the total ABO (accumulated benefit obligation) liability is $7.435 trillion. Compared to the $3.589 trillion in assets, this implies a true unfunded market value liability (UMVL) of $3.846 trillion and a funding ratio of 48.3 percent. The average liability-weighted Treasury discount rate used in this calculation is 2.77 percent. (page 10)

The analysis in this report reveals that despite markets that performed well during 2009−2014, state and local government pension systems were still underwater at the end of fiscal year 2015 by $3.846 trillion. Given flat market performance in 2016, even with the relatively good performance of the stock market in early 2017, the situation is very unlikely to have improved. Unfunded accrued liabilities are likely more than $4 trillion. (page 29)

12 responses to this post.

  1. Posted by Anonymous on May 15, 2017 at 11:39 pm

    Check out Figure ! on page 13………….

    Looks like NJ Plans have a funding ratio of just about 35% and an unfunded liability (on a Market Value basis) of $161.856 Billion.


    Workers ….. better work on that “Plan B”


  2. Posted by George on May 16, 2017 at 1:17 pm

    The curiosity of the 7% assumed return is that if the 7% isn’t real then fully funding the pension scheme also does not make sense. Better not to fund it and wait for lower asset prices. Just you wait and see, when the market tanks, those hedge funds will seem like geniuses once their hedging turns out to be brilliant. That’s why they are called hedge funds.

    Looking at NY, it seems NY state has much better funding that NYC. That sort of reminds me of the NYC fiscal crisis when NYS bailed out NYC. Back then the original ‘Silicon Valley’, the area around NYC (Xerox, Kodak, Bell Labs, Sperry-Univac, … and Upstate cities like Rochester, Syracuse, and Armonk) were able to pick up the tab while NYC instituted austerity measures. How’s Univac doing? Wow, what happened to Syracuse?


  3. Posted by Anonymous on May 17, 2017 at 9:50 am

    Quick analogy; when there’s a water shortage most don’t bother to conserve because they either don’t care or they’re counting on rain soon. Either way nothing changes until the well runs dry!


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