Tuesday, January 25, 2011


A spate of recent articles regarding the fiscal situation of states and localities have created the misguided impression that drastic and immediate measures are needed to avoid an imminent fiscal meltdown, according to a major new report from the Center on Budget and Policy Priorities. These articles mistakenly lump together states’ and localities’ current, largely recession-related fiscal problems with longer-term issues relating to bond indebtedness, pension obligations, and retiree health costs.

“Overheated claims about state and local budget problems not only are inaccurate, but also could lead policymakers to take unwise steps such as allowing states to declare bankruptcy or forcing them to change the way they report their pension liabilities as a condition for issuing tax exempt bonds,” said Iris J. Lav, senior advisor to the Center and the report’s lead author.

Claims that states and localities have $3 trillion in unfunded pension liabilities that may drive them into bankruptcy are similarly exaggerated, according to the report.

The oft-cited $3 trillion figure is based on valuing future liabilities as if investments in pension trust funds will earn no more than “riskless” investments such as Treasury bonds.

In reality, however, state pension trust funds are invested a diverse mix of stocks, bonds, and other instruments and have earned a much higher return in recent decades than riskless investments.

If one follows accepted state and local accounting rules and calculates pension liabilities using the historical return on plans’ assets, the unfunded liability stands at a more manageable $700 billion.

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