By Frank Keegan | State Budget Solutions
Take a look at Wisconsin’s public pension system to find out everything you need to know about how big this catastrophe really is. The Pew Center on the States recent “Widening Gap” update claims only the Badger State was 100 percent funded, as of 2010.
But applying standard accounting calculations, similar to those private pension funds use, reveals the hard truth in Wisconsin: 60 percent funded with guaranteed debt of $55 billion that citizens must pay to receive no government services or benefits of any kind.
When the best public pension state in the United State is that far in the hole, think about how bad the rest are.
Pew, which accepts official numbers, does acknowledge, “Though states have enough cash to cover retiree benefits in the short term, many of them — even with strong market returns — will not be able to keep up in the long term without some combination of higher contributions from taxpayers and employees, deep benefit cuts, and, in some cases, changes in how retirement plans are structured and benefits are distributed.”
That is because deceptive accounting afforded to public pensions lets politicians secretly use them to bypass legal debt limits and dump the cost on future taxpayers.
Pew admits that if new public pension accounting standards — while still much weaker than for private pensions — set to begin next year “had been in effect in 2010, those plans’ funding levels would have dropped from 77 percent funded to 53 percent” nationally.
Using realistic accounting similar to private pensions, it’s even worse, said Andrew Biggs, an economist at the American Enterprise Institute.
Biggs just calculated the real 2010 funding levels and pension debt for all 50 states in a study to be released in July.
He found the true total debt to be about six times the official estimate.
For Wisconsin taxpayers and betrayed public workers, this confirms a study released in May showing that the average household will have to pay the equivalent of more than $1,500 every year for 30 years on top of all rate increases and revenue from economic growth just to fund pensions.
Joshua Rauh and Robert Novy-Marx updated their “Revenue Demands of Public Employee Pension Promises” study for the National Bureau of Economic Research.
Thirty years is about how long it will take recent reforms imposed by 43 states to start saving taxpayers any money, and that’s only if there never is another downturn in any investment market of any kind anywhere in the world.
“States have responded with an unprecedented number of reforms that, with strong investment gains, may improve the funding situation they face going forward, but continued fiscal discipline and additional reforms will be needed to put states back on a firm footing,” according to Pew.
In fact, pension fund managers desperately trying to get returns imposed by politicians actually are putting public workers’ pensions at higher risk and increasing the chance that things will get even worse than economists say.
Three studies released last month by the Harvard Kennedy School Mossavar-Rahmani Center, the Federal Reserve Bank of Cleveland and by economists at Maastricht and Notre Dame universities prove beyond a doubt that municipal and state pension plans are unsustainable and need “drastic reform.”
Actual numbers for Wisconsin and the nation show what is happening. In “Solid Performer” Wisconsin in just four years, pensions lost more than $10 billion in assets and had negative “earnings” of $1.8 billion while paying out more than $16 billion. At the same time, total acknowledged pension obligations increased by more than $10 billion.
The state ranked best in the nation took a hit from which it never will recover.
Latest official numbers from the Census survey representing 89.4 percent of state and local pension value show the death spiral accelerating as of Dec. 31, 2011.
Year over year, those pension plans lost another $30 billion and were more than $80 billion below where they were in 2006.
For a system that must average 8 percent a year every year forever to pay benefits, it means the hemorrhage is spurting more blood than any of the recent Band-Aids can ever stanch.
Consider that the only 100 percent funded, “Solid Performer” pension state in our nation really is only 60 percent funded with a hidden tax tab of $55 billion, and realize economists’ calls for “drastic reform” are urgent because they are real.
Frank Keegan is editor of Statebudgetsolutions.org a project of sunshinereview.org. The State Budget Solutions Project is non-partisan, positive, pro-reform, proactive and anchored in fundamental-systemic solutions. The goal is to successfully engage political journalists/bloggers, state officials and opinion leaders in a new way of thinking about state government and budgets, fundamental reforms, transparency and accountability.