Forbes Highlights Staggering Public Pension Liabilities

by Daniel Fisher at Forbes:

…and if you live in Chicago, the ultimate bill for years of unfunded promises to municipal employees is much, much worse. Like $42,000 per household, according to a new study by Robert Novy-Marx of the University of Rochester and Northwestern University’s Joshua Rauh.
Novy-Marx and Rauh caused a stir last year when they examined state pension plans and found a $3 trillion gap between retirement assets and the promised benefits to government workers. Now they’ve examined the finances of 50 big cities and counties and found a smaller, but potentially more menacing hole in their pension plans. Those cities and counties collectively have promised their municipal unions and other employees $383 billion more than they can reasonably be expected to earn from the assets they have set aside. Extrapolated to all cities across the country, the unfunded liability is $574 billion.
“The $574 billion may seem small relative to the $3 trillion state deficit,” Rauh told me. “But keep in mind this $574 billion is in cities, and people can move out of cities when the goverment tries to raise taxes to pay these benefits.”
Chicago tops the list, with an unfunded pension liability of $44.9 billion or about $42,000 per household, followed by New York City at $122 billion or $39,000 per household and San Francisco at $35,000 per household. Measured another way, Philadelphia is in the worst shape, with only five years of assets to pay benefits at current rates, after which — barring an unprecedented explosion in stock-market returns — it will be forced to raise taxes to cover promises made to its retired employees. After that, assuming city tax revenues have grown 3% a year in the interim, Philadelphia would have to spend 19% of total tax revenue just to pay its retired workers. Boston, Chicago, Cincinnati, Jacksonville and St. Paul all are projected to run out of retirement assets by 2020 unless they increase contributions to their pension plans.
That’s a bigger problem for cities than for states or, say, the federal government, Rauh said.
“If people start seeing increased taxes to pay for pensions, without seeing increased services or actually reduced services, they’re going to leave,” he said.
Novy-Marx and Rauh have been criticized as alarmists for rejecting the accounting method most municipalities use to calculate the present cost of retirement plans. That method discounts the future stream of expected payments back at the expected rate of return on plan assets, typically 8%. Leave aside the fact that very few pensions have earned 8% a year over the past decade. It is nonsensical, they say, to discount future payments, a liability, at the same rate as the fund expects to earn on its assets.
Think about it in personal terms: If you had a $300,000 mortgage on a house that was only worth $200,000, you’d have a $100,000 hole in your balance sheet. Would that liability magically shrink if you shifted $20,000 of bank certificates of deposit into higher-yielding, but riskier stocks? Then why does a city with projected future payments of $66 billion and only $22 billion in assets (I’m thinking of a city whose initials are Chicago) get to reduce the present value of those liabilities simply because a portion of its money is in stocks? The theory is the city is “borrowing” from future taxpayers money that, if it had it to invest, would earn 8%. But it doesn’t have the money.
Novy-Marx and Rauh discount the future benefits at a rate that reflects the risk of the retirees not being paid: The risk-free  Treasury rate. That dramatically increases the tab but paints a more realistic picture of what taxpayers will be asked to cough up in future years when an army of workers retire, and start demanding those rich pensions politicians promised them as a cheap way to get votes.
Here’s some cities and counties to think about leaving before the retirement bill hits.