Deceptive Schemes to Bailout Unfunded Public Pensions

To sharpen the mind and invigorate the spirit we begin with the following riddle…

What does man love more than life;
Fear more than death or mortal strife;
What the poor have, the rich require;
And what contented men desire,
What the miser spends and the spendthrift saves
And all men carry to their graves?

Hint: The answer is not something.

That’s right.  The answer is “nothing.”

Recounting this riddle reminds us that sometimes nothing is something.  So, too, sometimes, for individuals, it’s possible to get something for nothing.  Yet, on the whole, it’s not possible for everyone to get something for nothing.

Nonetheless, there are gobs of people counting on getting exactly that – something for nothing.They’re counting on getting out of their pension fund more than they put in…and it’s creating a great big problem…

For example, last week new evidence was presented showing that public pension funds have a gigantic amount of obligations without the wherewithal to meet them.  According to the actuarial firm Milliman, the largest 100 public pension funds don’t have unfunded liabilities of $895 billion as they’d reported…they actually have unfunded liabilities of $1.193 trillion.  Moreover, Milliman reported that these pension funds have a combined level of funding of 67.8 percent.  This means that about 32.2 percent of the amount owed to current and future retirees is not in these pensions.

Some of the worst offenders, if you can believe it, are state pension funds…

How State Pension Funds Missed the Mark

The Illinois state pension fund is a downright disaster waiting to happen.  Only 45 percent of the state’s pension liabilities are funded.  How such a wide disparity between funding and obligations came to be is a disgrace.  Here 24/7 Wall St. attempts to explain…

“Each year, actuaries determine how much a state should contribute to its pensions to keep them funded.  Many states, for various reasons, did not pay the full recommended contributions for 2010, while others have been paying the recommended amount for years.

“In an interview with 24/7 Wall St., Pew Center on the States senior researcher David Draine explained why, despite paying the full amount, several states continued to be severely underfunded.  ‘The 2000s have been a terrible period for pension investments that have fallen short of their expectations … that’s a big part of the growth in the funding gap.’

“Unfunded liability can also grow due to overly optimistic assumptions about investment growth, pension payments that become deferred, and an increase in benefits or an increase in the number of beneficiaries without a corresponding increase in contributions, Draine explained.”

In short, we think what Draine is getting at is the simple fact that, on the whole, it’s not possible for everyone to get something for nothing.  Unfortunately, investment returns missed the assumed 8 percent mark.  Consequently, creative and deceptive schemes are being hatched across the land to fill these funding gaps by having others – that’s you – foot the bill.

Deceptive Schemes to Bailout Unfunded Public Pensions

Here in the land of fruits and nuts, for instance, there’s a rather sinister state measure on this year’s election ballot.  Proposition 30, which increases taxes on earnings over $250,000 and raises the sales tax, says it’s to fund education and safety.  From what the proponents tell us, including the governor, it’s about our children’s future.

As a father of two young children – one now in public school – we’re not buying it.  Here’s why…

Proposition 30 does not guarantee there will be new funding for schools.  More accurately, Proposition 30 is a shell game.  It allows politicians to take existing money already allocated to schools and use it for whatever they want…and then replace the money with the revenue from the new taxes.

Governor Jerry “Moonbeam” Brown already knows what he’ll use the money for.  He plans to use it to pay the pensions of retired teachers…

“California Governor Jerry Brown is trying to sell his tax hike to voters this November by saying it will go to schools,” explains the Wall Street Journal.  “The dirty little secret is that the new revenues are needed to backfill the insolvent teachers’ pension fund.

“That’s the news from an actuarial report presented to the board of the California State Teachers’ Retirement System this month indicating that pension contributions would have to increase by about 68 percent to pay down its $65 billion unfunded liability over the next 30 years.

“Since state law requires that half of all general fund tax revenues go to education, schools are in for a $3 billion to $5 billion windfall if the initiative passes.  But those new revenues won’t help reinstate arts education, sports programs or bus services.

“Instead, schools will have to use the money to cover their pension bills, or alternatively, to pay teachers more to offset the higher contributions that teachers may be asked to make to their retirements.  The state might also raise its $1.2 billion annual contribution to the teachers’ pension fund, which would allow schools to spend more of the new revenues on—no, not new textbooks—retiree health benefits.  These costs are growing as fast as pensions.”

Alas, this is one more example of what happens when governments run out of money.  It’s likely these sort of deceptive schemes are being pitched in a state near you.  Politicians will do whatever they can get away with – and more – to keep the fantasy alive.

In the end, we’ll all get squeezed…though we’d rather run the politicians out of town now and get it over with.

The sooner that happens…  The sooner we can all get on with it.


MN Gordon
for Economic Prism

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