This Is How States Fudge The Numbers On State Pensions And Health Care

The PEW centre 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 10 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 per cent 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.

This post originally appeared at Burypensions Blog.

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