The average public defined benefit pension plan is only 41% funded, when calculated by the same accounting methods used by the private sector, according to a report from State Budget Solutions, a non-profit organization that advocates for reform of state fiscal practices.
The study conducted for SBS by Andrew G. Biggs, a resident scholar at the American Enterprise Institute, uses fair-market value and risk-free investment returns to conclude that the actual unfunded liabilities in 2011 were $4.6 trillion. Estimates based on public pension accounting guidelines set by the Governmental Accounting Standards Board show that the average public plan was 75% funded in 2011, with an $885 billion shortfall. Those figures are expected to change under new GASB accounting rules that start taking effect next year.
“States can just assume ridiculous assumptions about rates of return and life expectancies. The legislators keep kicking the ball forward. Meanwhile, municipalities don't have that option,” Bob Williams, SBS president, said in an interview.
“The defined benefit program is just financially unstable,” said Mr. Williams, a former Washington state legislator. “If legislators underfund a defined contribution plan, workers know that right away. If they do that to a defined benefit plan, they don't know for 20 or 30 years.”
Mr. Williams said his group is working with political leaders at the state and municipal level to change their pension funding calculations. “They're not facing reality in most states. They are going off a cliff and they don't know it.”
Meredith Williams, executive director of the National Council on Teacher Retirement, said in an interview that the “ivory-tower academic analysis … is very much based on the current economic status of the world economy. If large public pension plans stood static, we'd all have our portfolios in buggy-whip stock. If we were to adopt the Biggs approach, we'd all be totally invested in bonds and that would certainly drive the costs up. We have to be long-term investors.”
Until June, Meredith Williams was executive director of the $38.3 billion Colorado Public Employees' Retirement Association, Denver.