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State Pension Fund Debt Raises Concern

From those masters of understatement at the Wall Street Journal:

Real Time Economics: US State Pension Funds Raise Concern

Posted by Sudeep Reddy

May 19, 2010

The budget woes facing U.S. states may not be as overwhelming as the troubles in Greece. But in a new paper, Northwestern University economist Joshua Rauh says at least seven states are heading toward crushing crises of the magnitude that would require U.S. bailouts in the next decade, and these crises are from one cause: state pension liabilities.

In some state constitutions, promised pension benefits to state and local government workers take a higher priority than general obligation bonds. Rauh, with the University of Chicago’s Robert Novy-Marx, previously estimated that state pension liabilities stood at $3 trillion at the end of 2008 compared with $1 trillion in other forms of debt.

How is this not as overwhelming a problem as Greece’s?

Even if pension funds received 8% annual returns, many large states would run so short–without any overhaul today–that raising state taxes to make up for it would be insufficient, he says. Illinois, for instance, would run out of money in its three primary pension funds by 2018. In the years after, the payments owed to existing state workers would be $14 billion, or more than half of the total revenue Illinois projects in 2010.

Other state pension funds expected to dry up by 2020: Louisiana, New Jersey, Connecticut, Indiana, Oklahoma and Hawaii. By 2030, 31 states could be in similar trouble, Rauh said in a report released Wednesday. He says the ultimate cost of a federal rescue could top $1 trillion.

"This scenario could happen sooner if taxpayers flee to other states with lower taxes and higher services, if contributions are deferred or not made, or if returns are lower than expected," said Rauh, an associate professor of finance at Northwestern’s Kellogg School of Management.

Are you listening New York? California?

His prescription: Allow states to issue tax-subsidized pension funding bonds–similar to the Build America Bonds program–for the next 15 years if they agree to major reforms. States would need to close defined-benefit pension plans and offer new hires a defined-contribution plan as well as guaranteed access to Social Security (which only a quarter of all public workers contribute to now). The net cost to the federal government, he estimates, would be about $75 billion.

Of course Mr. Rauh’s prescriptions will never bill filled, thanks to the state employee unions.

But notice that even if by some miracle these fixes were implemented, the federal government would still have to spend $75 billion to bail out the states.

And who is going to bail out the federal government?

This article was posted by Steve on Thursday, May 20th, 2010. Comments are currently closed.

3 Responses to “State Pension Fund Debt Raises Concern”

  1. proreason says:

    Let the states go bankrupt and pay only what they are able on their pension plans.

    It was fool’s gold anyway.

    Worse has happened to most of us already. Much worse in my situation.

    And the worst is not over.

    So I have no sympathy for them.

  2. tranquil.night says:

    “This scenario could happen sooner if taxpayers flee to other states with lower taxes and higher services, if contributions are deferred or not made, or if returns are lower than expected”

    Much, much sooner, given that all of these conditions are not just a guranteed certainty right now but are already well in play and accelerating.

    We’ve just begun to scratch the surface of this, I think. They’ve been masking this from the budget on purpose.

  3. heather08 says:

    With a lot of baby boomers set to retire, I predict a mass exodus from states that raise taxes to cover pension liabilities.

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