States have been called the laboratories of democracy. If so, then these laboratories are like Dr. Frankenstein’s, or one of those secret, sinister installations where mad scientists supervised by demented bureaucrats cook up chemical and biological agents that can wipe out humanity. State and local governments are burdened by promises made to their employees they cannot keep. Unlike the federal government, they have no recourse to a money-creating central bank, and cannot, except through accounting legerdemain, run deficits. The states have had a variety of creative, albeit perturbing, responses to fiscal stress. In the future expect them to get even more “imaginative.”
Last week Bloomberg.com hailed an increase in the average state pension funding ratio—the percentage that a pension is funded—from 68.7 to 69.3 percent. The article was more cause for concern than celebration. The increase was the first in six years, after five years of “recovery,” and was propelled by the stock market’s hefty ascent last year. The S&P index is not going to rise nearly thirty percent every year, and pension funds have been using unrealistic return assumptions to guide their contributions (many assume 7 to 8 percent, with high quality long-term bonds, which are a good portion of their investments, yielding less than 4 percent). Ominously, the pension funding ratio is much higher than that for promised medical care. The Pew Charitable Trusts, which have done several studies on states’ funding gaps, puts that ratio at under 5 percent in 2010, and it probably has not improved much since then. The total shortfall is at least $1.38 trillion. Continue reading
