It has been been almost nine years since The Federal Reserve launched their massive intervention in capital markets. Since late 2008, stocks, bonds, home prices, commercial real estate have skyrocketed.
Yet numerous public pension funds have not even been able to generate returns that meet or exceed their assumed actuarial rates. This is forcing numerous funds to lower their assumed actuarial rates which leads to higher required contributions to their broken pension funds.
Joshua Rauh at Stanford University has compiled his latest update of “Hidden Debt, Hidden Deficits: 2017 Edition: HOW PENSION PROMISES ARE CONSUMING STATE AND LOCAL BUDGETS.”
One of the most interesting (or depressing) charts is Figure 14: : County Contributions: Actual vs. Required to Prevent Rise in Unfunded Liability. According to Rauh, 11 of the 15 worst counties in terms of unfunded pension liabilities reside in the State of California (with Fresno leading the nation). Cook County (Chicago) is third. Unfortunately, Fairfax County in Virginia (where I reside) ranks 12th.
But Rauh also includes a more simple measure of pension plan underfunding: The Funding Ratio (Total Assets / Total Liability) as well as unfunded liabilities. Under this more simplistic metric, Wayne County Michigan (home of fiscal failure Detroit) is number one followed by Cook County IL (Chicago) and Allegheny County PA (Pittsburgh). Fairfax County VA is ranked 14th on this list of troubled pension systems.
Rauh also slices and dices that pension data, but it does not change the story: many county pension funds are woefully underfunded and will eventually need to be bailed-out by their States and/or the bailout specialist, the US Federal government.
At the state level, to no one’s surprise, Illinois is the most underfunded pension.
In terms of State contributions required to prevent a rise in unfunded liabilities, Illinois leads again with California in third place.
So, depending on what you think is relevant, either Fresno County CA or Wayne County MI (home of Detroit) are going to require a combination of tax increases or cuts in pension benefits in order to make ends meet. Chicago is currently relying on property taxes to bailout out their overly generous teachers’ pension benefits.
Maybe these woefully underfunded counties and state hired Park and Recreation’s Tom Haverford and his ludicrous money making ventures instead of simply diverisifying across passive indices from different asset classes (which would be far less costly).
Notes on Unfunded Market Value Liability (from Rauh pgs 2-3):
A rediscounting of the liabilities at the point on the Treasury yield curve that matches the reporting date and duration of each plan results in a liability-weighted average rate of 2.77 percent and unfunded liabilities of $4.967 trillion. Since not all of these liabilities are accrued, we apply a correction on a plan-by-plan basis (based on Novy-Marx and Rauh 2011a, 2011b) that results in unfunded accumulated benefits of $3.846 trillion under Treasury yield discounting. These are the unfunded debts that would be owed even if all plans froze their benefits at today’s promised levels. I refer to this measure as the unfunded market value liability, or UMVL.
The market value of unfunded pension liabilities is analogous to government debt, owed to current and former public employees as opposed to capital markets. This debt can grow and shrink as assets and liabilities evolve. From an ex ante perspective, the economic cost of the pension system to the sponsor is the present value of the increase in pension promises (service cost) plus the cost incurred because existing liabilities come due a year sooner (interest cost). Under lower discount rates, the service cost is higher but the interest cost is lower.