Government

That Other $3.5 Trillion We're On The Hook For (Give Or Take A Few Trillion)

Lots of city and state employees get sweet benefits when they retire — guaranteed pensions that continue to pay a big chunk of their salary, health plans that continue to cover lots of costs, that sort of thing.

But cities and states haven't set aside enough money to pay for all the benfits they've promised their current employees.

City and county governments around the country have more than $500 billion in unfunded pension liabilities, according to a report published this week by researchers at Northwestern. That's on top of the $3 trillion or so in unfunded pension liabilities for state governments, according to an earlier study by the same researchers.

They assume that pension plan investments will grow relatively slowly over time; the accounting method that state and local governments use assumes better performance. But even if you assume better performance, you still find hundreds of billions of dollars in unfunded liabilities for local governments, and $1 trillion or more for states.

New York State alone has $200 billion in unfunded retiree health liabilities, according to a report out this week from the Empire Center, a New York think tank.

"The daunting size of the health care obligation raises the possibility that localities will be forced at some point to choose between paying their retirees' medical costs and paying the investors who hold their bonds," today's NYT says.

Municipal bonds are considered super-safe; it would be a huge deal if lots of cities started defaulting on them in order to pay retiree benefits.

But the possibility is being batted around more and more. A report out last week from the Milken Institute and Kauffman Foundation suggested that bondholders, public-sector employees and taxpayers all "take a financial hit to ensure long-term stability."

In other words, the report is suggesting that:

  • Municipal bondholders accept that their super safe bonds aren't going to pay off in full
  • Public-sector employees accept that they won't get the retirement benefits they've been promised
  • Taxpayers accept higher taxes

Yikes.

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