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.