The average public pension plan is only 41 percent funded, when calculated with the same financial methods used in the private sector, according to a recent report
written by PublicSectorInc.org contributor Andrew Biggs
. Using a fair market valuation approach that captures the value of pension benefits guaranteed to be paid as opposed to using unrealistic Government Accounting Standards Board assumptions
based on the highly unlikely expected returns on stocks, private equity, or hedge funds, Biggs finds that public pensions "face unfunded liabilities of approximately $4.6 trillion dollars."
Although advocates of maintaining the status quo, as well as the GASB, have argued "government is inherently different from the private sector" and feel that "different accounting standards should apply," Biggs rightfully points out major flaws in this logic. First, government cannot go out of business so "government pension benefits are more likely to be paid than private pensions" which justifies a lower rather than higher discount rate currently being applied to public pension funds. Second, government's longevity makes pension liabilities inescapable. Rather than defaulting like a private corporation facing bankruptcy; government shifts the cost of the pensions to future generations
. That is, government transfers risk between a number of stakeholders--taxpayers, public employees, bondholders, and those who receive government aid.
Using fair market valuation, "unfunded liabilities are equal to roughly 30 percent of gross domestic product," a massive burden on federal, state, and local governments especially when considered with rising debt and unfunded entitlement costs. Given these soaring costs, pensions may well become tomorrow's financial crisis. Let's hope crisis is avoided and more states continue following lessons learned in Wisconsin.