By Chuck Reed

 

What happens to the costs of retirement benefits for government employees if pension plans achieve a 6 percent rate of return instead what they assume (usually 7.5 percent)?  Costs will go up.  Almost everyone agrees on that point.  Exactly how much is not so clear.  But now we have a very good estimate for 800 pension plans.

The bottom line: Many plans will suffer a doubling in costs if their returns on investments are only 6 percent.  Continuing to fund plans based on a 7.5 percent assumption in a 6 percent world grossly underfunds our obligations to our public employees.

Alicia H. Munnell and Jean-Pierre Aubry of the Center for Retirement Research at Boston College, in their paper An Overview of the Pension/OPEB Landscape, recently calculated costs based on a 6 percent discount rate and a 6 percent investment return.  The numbers are striking.  The burdens of increases will be enormous in some states, counties, cities and school districts, but not in all.  As the authors point out: “The picture at the state and local level is extremely heterogeneous, so it is crucial to look at the numbers state by state and locality by locality.

“The cost analysis calculates, separately, pension and OPEB costs as a percentage of own-source revenue for states, cities and counties,” they continue.  “It then combines pension and OPEB costs to obtain the overall burden of these programs.  Finally, it adds debt service costs to provide a comprehensive picture of government revenue commitments to long-term liabilities.”

Comparing the costs of these three types of debt with “own-source revenue” allows us to see the relative burden of these long term obligations compared to other jurisdictions.

The five worst states:  Illinois, New Jersey, Connecticut, Hawaii and Kentucky.

The five best states:  Nebraska, North Dakota, Iowa, Arizona and Minnesota.  

No surprises in the best states, where costs will increase slightly.  But there will be big surprises for the people of the worst states when their costs double.

There also will be unpleasant surprises in many big cities.  The worst of the big cities, where costs will nearly double:  Chicago, Detroit, San Jose, Miami and Houston.

Many big counties will also suffer as costs double for many. The worst:  Fresno, Kern, Los Angeles and Sacramento, Calif., along with Cook, Ill. Notably, seven of the 10 worst counties are in California.

Three of the worst school districts are in New York:  Syracuse, Buffalo and Yonkers, with Clark County in Nevada and Los Angeles Unified rounding out the worst five, where costs will go up by double or more.