Why The Debt Downgrade Means Doomsday For Public Pensions

blow up explosion

Photo: dirk_pepperd via Flickr

What will this precipitous drop in asset values do to public pensions across this country?Doom them.

Most of these plans are using ridiculously high interest assumptions to justify keeping required contributions low.

In the case of New Jersey, to justify an 8.25% interest assumption, assets were in investments that could possibly generate that return so, as of May 31, 2011, the plan’s $74.7 billion was allocated 27% in domestic equity, 30% in bonds, 20% in international equity, and 17% in alternative investments. 

With only about $300 million in employee contributions coming in over the last two months, while $1.3 billion in payouts left on top of this 10%+ investment drop the plan likely has about $65 billion this morning.

However, governments are handcuffed to react effectively. They can’t reduce benefits in any significant way, nor can they raise contributions through tax increases for the obvious reasons…plus one.

For funding purposes, the earliest any additional money would be required to be paid into the fund to make up the investment losses of the last (and coming) few days would be in 2014. That’s because valuations are done annually as of June 30, and there is a two-year lag between the valuation number developed and when it must be paid. For example, the June 30, 2012 valuation would develop the contributions that governments are ‘required’ to make as of April, 2014 by which time a doubling of pension contributions will be out of the question.

Three years ago I predicted, on another blog, that the New Jersey plan would be bust in 10 years. I didn’t know then nearly as much about the internal workings of politicians and budgets, especially on the local level. I now see myself back then as more of a Candide than a Cassandra.

This post originally appeared at Burypensions Blog.

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