Arizona's Public Pension Gap Twice as Big as Reported (and You're Next!)

Courtesy of Arizona's Goldwater Institute comes interesting news about the games governments play to minimize just how horribly underfunded their public pensions are, and what this means for Arizona taxpayers in particular. Writing on the institute's blog, Byron Schlomach, Director of the Center for Economic Prosperity, tells us:

[A]ctuaries assume a rate of return on all the money invested. The assumed rate of return, or “discount rate”, makes a big difference in how big current liabilities might be. For example, if you invested enough now to pay back a $100 debt in 10 years and you expected a rate of return of 5 percent each year, you would need to invest $61.39. But, if you expected an 8 percent return each year, you would only need to invest $46.32 today.

Arizona’s government pension funds use a discount rate of either 8 or 8.25 percent, considerably higher than the 5 percent they have actually earned over the last decade. Consequently, while Arizona’s unfunded pension liabilities are officially $16 billion, a huge sum, the unfunded liabilities using the actual rate of return of 5 percent are more like $37 billion. That’s $5,800 for every man, woman, and child in the state.

As edifying as I would find the sight of government employees sitting on street corners, shaking tin cans for their sustenance, to be, I don't think that's where this is going. I'll let you know when Governor Jan Brewer stops by to shake me down in person.

Here's a fun homework assignment ... Go check your state's public pension liabilities, and ask what discount rate is being used.

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  • ||

    Higher taxes will fix it all. I'm sure of it.

    /Herp.

  • ||

    I've said this before, but I bet if we were ever able to peer inside the government without all the obfuscation it does, even we, who think government is crooked as shit, would be utterly stunned at the level of corruption, graft, outright lies, cronyism, theft, and nepotism we saw. Like stellar distances our our deficit, I think it's actually too vast for our soft human brains to comprehend.

  • ||

    Hey Epi isn't that barrel like the one you wear? Only I can't tell if his has the hole in the back like yours.

  • ||

    Yeah I think that's a Maine Bucket Co. one just like min...hey!

  • Nephilium||

    I live in the former Congressman Kucinich's district, and have worked with people who knew Traficant. No level of corruption even surprises me anymore, let alone shocks me.

  • Fist of Etiquette||

    State government pension funds are too big to fail, dummies.

  • Fatty Bolger||

    And splinters, J.D. In all the wrong places.

  • R C Dean||

    Pensions own a lot of Treasuries. QE has suppressed interest rates on Treasuries, making portfolio ROI of 8% criminally fraudulent, and even 5% highly optimistic. Bernanke has a lot to answer for, and the wreckage of pensions and retirement is high on the list.

  • Red Rocks Rockin||

    Even the fact that a lot of these pension plans are based on the purchase of Treasuries is borderline fraudulent. When the bond matures, that money has to come from taxpayers to pay off the bond.

    Pensions are a great idea when you have an exponentially growing workforce and inflation, but when one of those suddenly breaks down--and the labor force participation rate has been dropping for years--then the pyramid collapses.

  • johnl||

    If you were managing a fund for retirement, you might invest some of that in treasuries. Even if you didn't, and put it all in corporate bonds, the rate you woud get is influenced by the treasury rate. It doesn't matter if it's your own retirement, a client, or a pension, it's not fraudulent to invest in treasuries.

    You did make me laugh though with "When the bond matures, that money has to come from taxpayers to pay off the bond."

  • db||

    Question: Is it a bad thing that it's now impossible to search Hit and Run comments for text and poster handle?

  • ||

  • ||

    How do you narrow the search to just reason? Do I put this in the search bar:

    site:reason.com + crayon + comment

  • ||

    Yes, but just "site:reason.com crayon comment". And note the top result.

  • ||

    That sorta works. Thanks!

  • db||

    hmm

  • db||

    "+comment" just returns every post ever because it's in the disclaimer:

    "Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time."

  • ||

    Do a 'must include' search: "site:reason.com +db comment"

    I used "comment" because I was searching for you and "db" wasn't descriptive enough. I just wanted to get comments by you as an example and didn't care what it was.

    Just read this.

  • db||

    Thanks, for some reason, I had never had much luck searching hitandrun with google before. I am rather well versed in doing custom searches but for whatever reason never got good results here. I wonder if it was a consequence of the old site and ai just never tried it when they updated.

  • db||

    That just points me to google's main page.

  • db||

    Thanks, btw. I never had luck with google searching hit and run before.

  • ||

    Yes. Searching comments was a way I used to be able to find old links and such that the commenters left. That was a very big minus about the move to the new Reason site.

  • Spartacus||

    Florida is using 7.75%. The latest actuarial report admits this is too high and recommends it be lowered to 7%. I don't remember the dollar amount of the deficit but we are either 83% or 87% funded (this is from memory), with the 7.75 assumption.

    I don't think 7% is too bad, myself. That's what I use for planning purposes, and my portfolio has been meeting it over the past several years (including the recession).

  • johnl||

    Then your portfolio includes some risky instruments. Which is the right thing to do for most people. If you take a hit on some of your securities, you can work an extra year, downsize the retirement, or make some other adjustment. But pensions can't adjust to bad news. They need to make risk free investments.

  • buddhastalin||

    The SP500 is up 119% from 10 years ago, adjusted for dividends. Annualized that's about 8% a year. I wouldn't consider the SP500 to be particularly risky.

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