Pensions Across the Country Threatened by Deficits

This past Sunday, the Washington Post ran an article about a silent crisis facing the pensions of public employees.

The Post writes:

"The funds that pay pension and health benefits to police officers, teachers and millions of other public employees across the country are facing a shortfall that could soon run into trillions of dollars."

More ominously, accounting techniques have disguised the extent of this crisis.

"But the accounting techniques used by state and local governments to balance their pension books disguise the extent of the crisis facing these retirees and the taxpayers who may ultimately be called on to pay the freight, according to a growing number of leading financial analysts."

At the local level this is particularly alarming:

"Local governments use these same techniques for their pension funds and face deficits that further contribute to what some investors and analysts say may be shaping up to be a massive breach of faith with a generation of public employees."

Here is the most alarming danger. And it seems to directly apply to the situation at the local level.

"Very small shifts in actuarial assumptions can generate huge changes over time," said Susan Urahn of the Pew Center on the States, which has studied the issue. "It is not very transparent, and even where it is transparent not many people understand it."

Sound familiar? One of the ways, Davis has made the budget projections look better is by shifting some of the assumptions.

This is from last night's Davis Enterprise article:

The city funded benefits under a pay-as-you-go method until last fiscal year, when it added an extra $500,000 to the payment. To fully fund the program, which would save millions in the long run, the city would have to pay in about $4 million per year, Navazio said.

'Given the level of benefits and the cost of benefits, we need to be setting aside 6 percent of our employee salaries, and that percentage is pretty high compared to other cities,' Navazio said. 'That's also a reflection of the city's benefits, which are pretty high, and how that's packaged.'

'We have got to find the means to fund that,' Councilman Stephen Souza said.

'We are fully intending to deal with it, we're just not dealing with it fully in this fiscal year,' Navazio said.

Labor negotiations will reopen during the 2009-10 fiscal year, Navazio said, and money has been set aside to address the cost-of-living increases expected.

Council members agreed there is a bright side to the city's budget picture. For one, Davis has maintained a healthy, 15 percent reserve, totaling about $5.6 million.

The reserve could be used to address further state cutbacks that may be part of Gov. Arnold Schwarzenegger's revised budget, expected out today. The reserve also could soften any blows if property and sales tax assumptions built into the budget are incorrect.

All of which suggests that the very budgets that the city was celebrating on Tuesday night might be very tenuous. The Washington Post article cites the longevity of people as one plank of the problem. Simply put as people live longer, pensions have to pay them for longer. In order for people to continue to receive the benefits that were promised to them, state and local government must make fiscally responsible decisions. If pensions are non-transparent, the costs hidden, or if their levels are unsustainable, they will serve to undermine the pension system as a whole. Placing the burden on the taxpayers and hiding the costs, hoping to forestall difficult decisions to future leaders, in actuality threatens the entire system. That means everyone gets hurt by unsustainable policies.

---Doug Paul Davis reporting