Public policy group calls for risk-free public pension discount rate

State governments could provide a clearer picture of public pension debt as it relates to state budgets by using a low-risk discount rate, said a new report from the Competitive Enterprise Institute released Wednesday.

The free-market policy group looked at state government pension debt to help businesses decide where to locate. Some states face budget crunches “due to massive pension debts that have accumulated over the past two decades,” said CEI senior fellow Aloysius Hogan in the report's executive summary. The report cites several contributing factors, including legal protections for benefit payments, opposition from public-sector unions to change pension benefits, and “bad math” that understates pension underfunding.

Pension underfunding that leads to tax increases and reduced public services could be a disincentive to businesses, the report said.

Instead of using more optimistic discount rates for valuing pension liabilities, said study author Robert Sarvis, state governments should calculate their pension costs using a “low-risk” discount rate based on current Treasury bond rates.

Mr. Sarvis, an economist and former Libertarian candidate for governor in Virginia, analyzed several sources of public pension funding levels and re-estimated them at a “fair-market value.” In West Virginia, for example, underfunding jumped to 20% of gross domestic product from the 11.2% currently reported by state officials. Even a well-funded public pension climate like Wisconsin saw underfunding jump to 14.1% from 0.8% of GDP, using a risk-free discount rate for pension liabilities.