Adjusted Net Pension Liabilities (ANPL) exploding at state level – pension cuts loom

Massive pension underfunding is reaching critical levels in the states of Illinois, Connecticut, Alaska, Kentucky, and New Jersey.  The underfunding problem is a growing concern in all but two of the remaining states.

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ZeroHedge 10-10-2016 –  “State Pensions … Likely to Enforce Benefit Cuts”

A new research note from Moody’s…:

 Total US state aggregate adjusted net pension liabilities (ANPL) totaled $1.25 trillion, or 119% of revenue in fiscal 2015, Moody’s Investors Service says in a new report. The results, based on compliance with new GASB 68 accounting rules, set a new ANPL baseline and are poised to rise for the next two fiscal years as market returns fall below annual targets.
The median return for public pension plans in FY 2016 was 0.52% compared to an average assumed investment return of 7.5%,” Moody’s Vice President — Senior Credit Officer Marcia Van Wagner says. “We project that aggregate state ANPL will grow to $1.75 trillion in FY 2017 audits.
The states with the highest pension burdens — measured as the largest three-year average ANPL as a percent of state governmental revenue — were consistent with previous years. Illinois topped the list with pension liabilities at 280% of total governmental revenue, followed by Connecticut (Aa3 negative) at 209%, Alaska (Aa2 negative) at 179%, Kentucky at 162%, and New Jersey at 157%.
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The costs of government pension and retirement health benefits are expected to rise rapidly in coming years.  Governments have promised their  workers generous retirement benefits, but most states have not put enough money aside to pay for them.  As a consequence, state and local governments will either have to cut benefits in coming years or impose higher taxes.

Per the following chart, many states have racked up over $20,000 of liabilities per capita, a level from which it will be very difficult to recover absent benefit cuts, massive tax hikes and/or a federal bailout.

Debt, Pension, OPEB

But, as the CATO Institute points out, the pension crisis is likely much worse than what most auditor reports would suggest because discount rates of 7.4% are unreasonably high.  CATO estimates that reducing the discount rate from 7.4% to 2.7% would increase state pension underfunded liabilities from $1.2 trillion to $3.4 trillion.

 Pension shortfalls are actually larger than these figures indicate.  Those are the officially reported figures, but financial experts think that the discount rates used to report pension liabilities are too high.  Higher discount rates reduce reported liabilities and create an overly optimistic picture of pension plan health.
In his study, Rauh recalculated pension plan funding using a 2.7 percent discount rate, rather than the official average rate of 7.4 percent.  His    recalculated  unfunded  liability jumps from $1.2 trillion to $3.4 trillion.  Similarly, Munnell and Aubry found that their unfunded pension liabilities  jumped to $4.1 trillion if plans are estimated using a 4 percent discount rate.  Under that assumption, the funding level of state and local pension plans averages just 45 percent.

 

Unfortunately, the pension ponzi becomes more and more unsustainable each year with funds simply borrowing from future benefit payments, which are almost certainly impaired in many states, while paying current benefit recipients in full.  While these types of “kick the can down the road” games can be played for a long time, eventually the massive underfundings will have to be addressed…and that will not be a pretty day.

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America needs an economic acceleration plan that will provide for massive public and private debt elimination and generate dynamic, free market economic growth.

America’s one and only plan for growth and economic liberty:

The Leviticus 25 Plan 2017 –  $75,000 per U.S. citizen

The Leviticus 25 Plan 2017 (1703)

 

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