Our States’ Hidden Budget Deficit

A hidden deficit exists in most state budgets. This large, and almost always, overlooked gap in our budget goes without much criticism from our local elected officials due to a lack of leadership in dealing with the bloating dilemma. The problem? Outstanding pension liabilities. Rather than fixing the problem, politicians prefer a “kick the can down the road” approach to dealing with the unfunded pension liabilities. It is past due that we forget this practice and begin to protect the pensions of retirees.

According to the last U.S. Census Bureau over 4,000 public sector retirement systems exist in the United States today. Those funds equate to $3.86 trillion in assets to provide for the 14.7 million active pensioners and the 9.9 million retired pensioners owed the promised value of the pension funds. However, these millions of pensions express growing concern that the money owed to them and their families will not be there. In 2016, the aggregate funding levels for pensions funds was 71.4%, which is a decrease from 86.4% funding just 10 years ago in 2007. A steady trend of less funding and more outstanding liabilities leaves public employees and retirees with a looming question: who is on the hook for these unfunded liabilities?

There are only two methods of funding pension funds – contributions made by the government, i.e. the taxpayer, and from investment growth. The economic problem exists in the latter. The assumed rate of return is lagging because of overly optimistic expected returns that leave politicians at an impasse. Taxpayers will ultimately shoulder the difference in the returns if the assumed rate of return is lowered – hence the hesitation and postponement of responsibility onto future elected officials or administrations.

The taxpayers’ coffers will assume the burden of these unfunded liabilities unless there is a pension promise default. This default, however, goes against some state constitutions. The unilateral trend of increased unfunded liabilities over the years will continue to have near term and lasting effects on states access to the market. A recent example is Illinois’s downgraded status to just above junk status for general obligation bonds. Unlike previous calculations, there is an increase in accounting for the percentage of pension liabilities into the credit rating of a state.

The end of the road is here. We can no longer “kick the can” on our states’ hidden budget deficit. Our local, state, and federal workers plan on the money promised to them. It is time that we address the concern head on and protect our pensions.

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