Judging from newspaper headlines and op-ed columns, you'd think that state and local governments are all on the verge of bankruptcy because of pension underfunding. Although I have spent the past two years chronicling the problems with public pension funds, it's time to set the record straight.
Many public pension systems have become bloated-but-underfed beasts that need to be tamed. That is not an impossible task in most states. With a few exceptions, state and local governments and their pension funds will slowly pull out of the current financial crisis. It may take a decade, but they will disprove the doomsday pronouncements of those whose primary objective is to roll back what they see as lavish benefits for public employees.
While state and local government leaders and associations are totally focused on defending their pension plans, they should be devoting twice as much time and energy to their real nightmare: retiree medical benefits, also known as OPEB (other post-employment benefits).
Just look at the numbers: Using conventional actuarial methods and the latest market value of pension portfolios, the current level of unfunded liabilities of public pension funds nationwide is somewhere in the range of $700 billion — give or take 20 percent. Stocks have rebounded 80 percent from their 2009 market vortex so real-time funding ratios improved last year.
Even using the announced prospective methodologies of the Governmental Accounting Standards Board (GASB), which would discount the unfunded liabilities with a super-conservative tax-free interest rate, the total of unfunded liabilities today is around $1 trillion.
Sure, that is a huge number, but it's a drop in the bucket compared to the $14 trillion of outstanding federal debt and the estimated $50 to $100 trillion of unfunded Social Security and Medicare liabilities now outstanding which Congress continues to side-step.
And far more relevant to the state and local government debate and the deepening concerns in the municipal bond market for state and local government debt obligations is the $2 trillion of unfunded OPEB liabilities.