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Just how big are public pension liabilities?

State Budget Solutions | by Bryan Leonard | March 4, 2011

Corrected Version: This text has been edited to correct an error in a prior version.  The total debt from the Pew study has been corrected to be $452,195,687,000 and the text has also been edited to reflect that amount. 

Download file SBS Study: Just how big are public pension liabilities?

The jig may finally be up for state pension funds.  After years of fooling the public and the federal government, academics and the media are starting to take notice of the growing crisis.  Indeed, the breadth and depth of the public pension debt in the states is being exposed in news sources ranging from The New York Times to Newsweek. But just how big is the problem?

One of the most insidious aspects of pension liability is its stealth nature.  Pension obligations don't appear on state balance sheets.  As such, states with billions in unfunded pension liabilities may technically brag of "balanced" budgets while being swamped by pension debt.  For example, Arkansas claimed a balanced budget last year, but had at least $2 billion in unfunded pension liabilities. Indeed, the unfunded pension promises in most states dwarf the total outstanding debt, tax revenues and spending. 

Complicating the issue even further is the difficulty in deciphering and understanding pension liability.  As is often at the root of government transparency problems, states have devised special accounting rules that are inconsistent with the private sector and that hide the problem.  As a result, the true size of pension liabilities is understated.

Fortunately, several research organizations have made serious efforts to understand and quantify this burgeoning issue.  Here’s a look at a few.

The Pew Center on the States recently released a report entitled "The Trillion Dollar Gap" that estimates the difference between the financial promises states have made and their actual assets. Pew calculates that states are saddled with almost half a trillion dollars in pension obligations; worse, Pew warns its estimate is low because most states won’t assess their plans until June and the Pew calculation doesn’t reflect dramatic investment declines in the second half of 2008.

Others have undertaken the arduous task of trying to estimate how big public pension liabilities would be if states used the same market-valuation approaches as the private sector. One such attempt comes from Andrew Biggs of the American Enterprise Institute (AEI). Biggs points out that public pension funds are allowed to assume high rates of return without recognizing risk. Using the popular Black-Scholls technique for options-pricing, Biggs estimates what public pension promises would be worth if they were valued using private sector methods.  Under his analysis, the taxpayers are on the hook for a staggering $2.8 trillion in unfunded pension liabilities.

Still another approach is the one employed by Robert Novy-Marx of the University of Chicago and Joshua Rauh of Northwestern University, who point out that the future liabilities of state governments should be calculated in present-value terms. Using the discount rate on zero-coupon Treasury yields, they calculate the present value of state employee pension liabilities to be nearly $2.5 trillion. 

Years of inaction and obfuscation have contributed to this fiscal catastrophe, and the extent of the catastrophe is made alarmingly clear by the results of all three studies.  Now, many states stand at the brink of bankruptcy, the federal government continues to “aid” them with stimulus packages – and still the states are not addressing the real problems.  Until the states are forced to truly balance their budgets, this problem will continue to run rampant.  It’s time for lawmakers to enact true reforms in pension accounting and funding.

Appendix A  State Unfunded Pension Liabilities

State

PEW Study

AEI Study

Novy-Marx and Rauh (2009) Study

AL

$9,228,918,000

$43,544,880,000

$40,400,000,000

AK

$3,522,661,000

$14,192,229,000

$9,300,000,000

AZ

$7,871,120,000

$45,004,090,000

$48,700,000,000

AR

$2,752,546,000

$20,026,314,000

$15,800,000,000

CA

$59,492,498,000

$398,490,573,000

$370,100,000,000

CO

$16,813,048,000

$71,387,842,000

$57,400,000,000

CT

$15,858,500,000

$48,515,241,000

$4,900,000,000

DE

$129,359,000

$5,688,663,000

$5,100,000,000

FL

($1,798,789,000)

$98,505,110,000

$8,980,000,000

GA

$6,384,903,000

$58,742,784,000

$57,000,000,000

HI

$5,168,108,000

$18,533,398,000

$16,100,000,000

ID

$772,200,000

$10,022,613,000

$7,900,000,000

IL

$54,383,939,000

$192,458,660,000

$167,300,000,000

IN

$9,825,830,000

$33,756,655,000

$30,200,000,000

IA

$2,694,794,000

$21,266,226,000

$17,000,000,000

KS

$8,279,168,000

$21,827,991,000

$20,100,000,000

KY

$12,328,429,000

$47,016,382,000

$42,300,000,000

LA

$11,658,734,000

$43,797,899,000

$36,400,000,000

ME

$2,782,173,000

$13,227,289,000

$11,800,000,000

MD

$10,926,099,000

$48,199,258,000

$43,500,000,000

MA

$21,759,452,000

$60,476,274,000

$54,200,000,000

MI

$11,514,600,000

$72,187,197,000

$63,600,000,000

MN

$10,771,507,000

$59,354,330,000

$55,100,000,000

MS

$7,971,277,000

$32,225,716,000

$28,700,000,000

MO

$9,025,293,000

$56,760,147,000

$42,100,000,000

MT

$1,549,503,000

$8,633,301,000

$7,100,000,000

NE

$754,748,000

$7,438,589,000

$6,100,000,000

NV

$7,281,752,000

$33,529,346,000

$17,500,000,000

NH

$2,522,175,000

$10,233,796,000

$8,200,000,000

NJ

$34,434,055,000

$144,869,687,000

$124,000,000,000

NM

$4,519,887,000

$27,875,180,000

$23,900,000,000

NY

($10,428,000,000)

$182,350,104,000

$132,900,000,000

NC

$504,760,000

$48,898,412,000

$37,800,000,000

ND

$546,500,000

$4,099,053,000

$3,600,000,000

OH

$19,502,065,000

$187,793,480,000

$166,700,000,000

OK

$13,172,407,000

$33,647,372,000

$30,100,000,000

OR

$10,739,000,000

$42,203,565,000

$37,800,000,000

PA

$13,724,480,000

$114,144,897,000

$100,200,000,000

RI

$4,353,892,000

$15,005,840,000

$13,900,000,000

SC

$12,052,684,000

$36,268,910,000

$43,200,000,000

SD

$182,870,000

$5,982,103,000

$4,700,000,000

TN

$1,602,802,000

$30,546,099,000

$23,200,000,000

TX

$13,781,228,000

$180,720,642,000

$142,300,000,000

UT

$3,611,399,000

$18,626,024,000

$16,500,000,000

VT

$461,551,000

$3,602,752,000

$3,300,000,000

VA

$10,723,000,000

$53,783,973,000

$48,300,000,000

WA

($179,100,000)

$51,807,902,000

$42,900,000,000

WV

$4,968,709,000

$14,378,914,000

$11,100,000,000

WI

$252,600,000

$62,691,675,000

$56,200,000,000

WY

$1,444,353,000

$6,628,204,000

$5,400,000,000

Total US

$452,195,687,000

$2,860,967,583,000

$2,485,800,000,000

Filed Under : Pensions

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