This week Joe Weisenthal of Business Insider discussed the vote to be held tomorrow by California teachers’ pension, CalSTARS, on reducing the annual investment estimate from 8% to 7.5%. He kindly included a link to when the first 11 state pensions will run dry. (Connecticut comes in at #2 with estimated flame-out date in 2019; if Foley and Malloy had any sense, they would be fighting to concede defeat.)
This feel-good slide show of state-by-state fiscal mismanagement was based on the good work done by Prof. Joshua Rauh of Northwestern’s Kellogg School of Management. Dr. Rauh has determined that as of the end of 2008, the gap between pension assets and promised benefits for all 50 states is $3 trillion. This is based on average return going forward of 8%.** As you may recall, yesterday’s post discussed John West’s paper “Hope Is Not A Strategy” that walks us through why the likelihood of achieving this Pollyannaish 8% assumption is less than 2%.
Dr. Rauh has determined that, with the sporting 8% annual return assumption, states could remedy this situation in 10 years by contributing an extra $75 billion to their pension funds each year. That would represent an increase of 75%. Given that most statehouses are wrestling with whether or not to cut pension funding, I don’t think we will be seeing many 75% increases anytime soon.
Without a huge increase in funding, if we are lucky and asset class returns come in as expected, the median year for state pension funds to run dry is 2026. If state pension benefits have to be paid out of state revenues, they will consume an average of 27% of all revenues. This assumes annual state revenues increase an average of 3% per year.
One might think that all this dire work would get Dr. Rauh down, and perhaps after he published his findings on this enormous state pension debacle in May, he would have taken some time off to do something more uplifting, like euthanizing puppies. But no, Dr. Rauh is indefatigable fellow. Just three weeks ago, he published a paper detailing dire outcomes for municipal pension systems.
Tack on another $574 billion for municipal pensions (good news, counties included!). New York City accounts for more than 1/5 of these unfunded liabilities, a whopping $38,886 per household. And you thought the rent was too damn high.
Tomorrow: NASA determines that without massive infusion of hydrogen and helium Sun to burn out by 2025.
*According to Dr. Rauh’s calculations, Alaska, Florida, Nevada, New York, and North Carolina do not have unfunded state pension liabilities, but 45 states doesn’t make for a great headline. Plus, I’m sure there other important things they ignoring.
**I want to note the Dr. Rauh is using 8% to reflect the typical state pension fund assumption. It is not necessarily his view of the “right” assumption.