A once-obscure question is getting a lot more attention these days: Exactly how underfunded are government pension plans?
Georgia says its two largest plans are about 86 percent funded, or roughly $10 billion short, in total.
Others disagree. In recent papers, finance professors Joshua Rauh and Robert Novy-Marx estimated that Georgia’s pensions are nearly $84 billion short — part of what they believe to be a $3 trillion nationwide pension deficit threatening the nation’s local and state governments.
Such huge shortfalls could eventually force the federal government to bail out states and local governments, speculated Rauh, with Northwestern University, and Novy-Marx, with the University of Rochester.
“We are not far from the point where these will impact the ability of state and local governments to operate,” the two wrote.
How can such critics and government pension officials be so far apart? They use differing accounting methods.
Under government accounting rules, Georgia’s pension officials estimate how much money is needed to meet long-term obligations based on what investment returns they expect to get over the next 30 years or so. They usually assume investments will earn 7.5 percent — a bit more conservative than most governments’ typical guess of 8 percent a year.
Citing the recent stock market crash, critics such as Novy-Marx and Rauh say that approach is too risky and no longer allowed at private-sector pension plans.
Instead, they say government pensions should use much more conservative projections based on the lower interest rates paid by federal or municipal bonds. That would force governments to set aside more money in their pension plans to keep them fully funded.
But the critics’ method, which doesn’t follow government accounting rules, is too expensive and “artificially balloons the liabilities,” said Jeff Ezell, head of the Teachers Retirement System of Georgia. The state’s largest pension plan, it covers about 314,000 employees and retirees.
It’s like having to put all the money in the bank today to pay a 30-year mortgage, he said.
Private companies must use more conservative estimates because they face a greater risk of bankruptcy, he said. Most corporations have since closed their pension plans under the more conservative funding rules.
Government pension officials also complain that critics based their estimates on the depressed asset values of 2008 and 2009 and don’t reflect the recent stock market recovery.
Pamela Pharris, who heads the Employees’ Retirement System of Georgia, the state’s second largest public pension system, said the plan took a horrific hit in the 2009 fiscal year. It “was the worst year we saw, and that all pensions saw,” she said.
Since then, however, the U.S. stock markets have roughly doubled in value. That promises to bring relief that critics haven’t accounted for, pension officials argue.
“Everybody’s looking for ways to solve this,” said Ezell. “It just seems that some of the folks are getting a little on the extreme side.”
Comparing Georgia’s pensions with other states
Differing methods of calculating and combining pension and debt liabilities can result in different views on the scope of problems . The list at left is from Moody’s; at right are the Rauh/Novy-Marx research findings.
Colorado2299%Colorado2827%
Illinois3297%Rhode Island3765%
Mass.4272%Illinois4717%
S. Carolina5264%Alabama5637%
Connecticut6263%Wisconsin6629%
Kentucky7223%S. Dakota7603%
New Jersey8223%Missouri8575%
Rhode Island9217%Mississippi9573%
Hawaii10210%Oregon10573%
Georgia31111%Georgia19460%
Nebraska502%Vermont50171%
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