Opinion: Editorials

Looming public pension crisis undercuts optimism on economy

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Photo - CHICAGO, IL - SEPTEMBER 10:  Mayor Rahm Emanuel (2nd R) visits Chicago Public School children at Woodson Regional Library on September 10, 2012 in Chicago, Illinois. In the settlement reached to end the city's teachers strike Emanual delayed trimming the educators' annual pension increase. (Photo by Scott Olson/Getty Images)
CHICAGO, IL - SEPTEMBER 10: Mayor Rahm Emanuel (2nd R) visits Chicago Public School children at Woodson Regional Library on September 10, 2012 in Chicago, Illinois. In the settlement reached to end the city's teachers strike Emanual delayed trimming the educators' annual pension increase. (Photo by Scott Olson/Getty Images)
Opinion,Editorial

President Obama's brightening re-election prospects have a lot to do with the fact that polls shows economic optimism ticking upward -- mainly among Democrats who are buying the administration's rhetoric that we have turned the corner on the economy.

Those Democrats are entitled to their own opinions, but they are not entitled to their own set of facts.

If the stubbornly high unemployment rate, $16 trillion deficit and tepid economic growth are not enough to sober them up at this point, here's a bit a news that should hit them closer to home: The public pension funding crisis is getting worse.

State and local governments are getting squeezed ever more tightly and something is going to have to give. They will be forced to cut key services to residents, hit up taxpayers again with higher levies, or curtail pension benefits.

A survey this month by Loop Capital Markets found that only 58 of the 149 state-level pension plans it viewed were funded at 80 percent or more, the standard by which funds are judged to be financially healthy. The median funded ratio for state pension plans fell from 76 percent in 2010 to 73 percent in 2011.

What passed for good news here was that while Loop Capital said the situation was "bad," it argued it was not "catastrophic." Not yet anyway. States and local governments could still make up the shortfall.

That's the most positive spin on the situation. The bipartisan State Budget Crisis Task Force used a colder, more clinical eye in a July report. It found that state and local governments underfunded their pension plans by more than $50 billion between 2007 and 2011. The shortfall will have to be made up.

The task force noted that under current actuarial assumptions the total unfunded liability is $1 trillion, but many economists believe those assumptions are far too generous. The real unfunded liability may be as high as $3 trillion. Why are pensions underfunded in the first place? Because elected officials have overpromised benefits and then failed to fill the coffers.

"California, Illinois, and New Jersey, with 19 percent of the nation's population, accounted for more than half of the contribution shortfall. Between 1996 and 2011, Illinois underpaid contributions by $28 billion," the task force report noted.

Elected officials aren't exactly profiles in courage here. Consider Chicago, where Mayor Rahm Emanuel just settled a strike by giving teachers a 17.6 percent raise on top of an average salary of $71,000. This in a city whose school system already faces a billion-dollar budget deficit. (The teachers went on strike mainly for another reason: to protest being subject to evaluations based on their students' progress.)

Meanwhile, the Chicago teachers only contribute 2 percent of their pay to cover their pension obligations, according to the New York Times. The school district -- that is, the taxpayer -- covers the rest, to the tune of $130 billion a year. The pension fund has enough assets to meet only 58 percent of its liabilities, according to the union.

Emanuel's efforts to trim the 3 percent annual pension increase for teachers? Put off until next year. And so the problem continues to build. The irony here is that ones most likely to suffer are the same people Democrats see themselves as defending: public employees, who may see their pensions cut when funding runs dry, and people dependent on public services, who may see those cut as state and local governments scramble to cover pension costs.

That's the future we are rapidly heading toward. Not a bright one, is it?

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