Last week, the Wall Street Journal ran a longish feature on state governments grappling with budget deficits and future obligations. If you believed the underlying numbers, it made you feel better. The question is: should you believe the numbers?
Joshua Rauh, who has emerged as one of the nation’s leading experts on this topic, argues that the numbers are wrong.
He writes on his blog at Northwestern University’s Kellogg School:
The (WSJ) article includes a graphic, “How the States Measure Up,” including unfunded pension liabilities, sourcing Moody’s for the pension data. Moody’s covers itself by using official statistics provided in the annual financial reports of the systems — although according to another WSJ article from Tuesday Feb 22, Moody’s has “voiced support” for legislation that would require states to furnish annual reports to the Treasury using the correct methodology.
According to the graphic, unfunded liabilities to GDP maxes out at around 16% for the states Hawaii and Mississippi. The reality is that when proper financial discounting is applied to pension liabilities, the average unfunded liability across the 50 states represents 18% of GDP. For eight states it is over 25% of GDP. For three it is over 30% of GDP, and for one (Ohio) it is 35% of GDP. Here is a table. This includes only unfunded liabilities from systems sponsored at the state level, and only benefits promised based on service and salary up until today (legacy liabilities). Local liabilities increase the unfunded liability by about 20%.
If you are new to this and wondering what the difference is between my statistics and the official methodology, the issue is the standards established for pension measurement by the Government Accounting Standards Board (GASB). GASB allows state and local governments to disclose their debts by assuming returns on risky assets. The governments assume that the actual return will be identical to the targeted return, most commonly 8%, ignoring the fact that if the assets do not return 8%, the taxpayers are on the hook for the downside. GASB confounds the measurement of the amount of the debt with the government’s risky plans for repaying that debt.
Moving the debate about unfunded pension liabilities forward requires that everyone start with the same set of numbers.
The Rauh numbers seem much more realistic than the (present) Moody’s numbers. Better to live in the real world, no?
NOW WATCH: Briefing videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.