Throughout the nation, pensions for government employees will have only a fraction of the money needed to pay the legally obligated benefits. These unfunded debts, in many cases with a priority claim on taxes compared with other government services, overshadow many states' operating budget deficits.
California's huge $19 billion budget deficit, papered over with accounting gimmicks last week, was small potatoes by comparison.
The Foundation for Education Choice released last week a study that says California public retirement systems' unfunded liabilities are $326 billion, more than three times what state officials calculated, yet less than a Stanford study this year that put the deficit at up to $500 billion. Moreover, city and county employee pensions are underfunded by more than $49 billion, according to the foundation report, "Trouble Brewing, The Disaster of California State Pensions."
Unfunded liabilities are the amounts owed to meet promised pension payments beyond a fund's assets, money the funds expect to earn through investments.
On the heels of that study, a separate report this week by professors at Northwestern and Rochester universities declared the nation's largest municipal pension plans to have $574 billion in unfunded liability, on top of as much as $3 trillion in unfunded state pension promises, the Washington Post reported.
The analysis of 50 major cities and counties, accounting for two-thirds of the nation's 3 million local government employees, concluded that local officials "routinely cling to unrealistic projected investment earnings to understand their pension liabilities," the Post said.
Gov. Arnold Schwarzenegger won a small concession in the new 2010-11 state budget. Newly hired state employees' pension benefits will be scaled back significantly to pre-1999 levels. But pension liabilities already on the books for retired and current employees are unaffected.
What's needed is a way to reduce existing obligations, or they threaten to drain government operating budgets increasingly as workers retire. Mounting local and state unfunded liabilities will lead to pressure for the federal government to bail out localities, a horrendous consequence that would penalize prudent fiscal managers, while encouraging more irresponsible pension management.
Unless public pensioners agree to reduce what's owed them, massive pension fund defaults may be in the offing.