December 13, 2010

Getting an Accurate Picture of State Pension Liabilities

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State governments have reported unfunded pension liabilities—the difference between what plans have promised to pay public workers and the assets set aside to pay out these benefits—of $452 billion as of June 2009.  Estimates place the shortfall in local plans at an additional $190 billion. These reported figures, however, severely underestimate the pension obligations governments owe to public workers. To measure pension obligations accurately, state and local governments must institutionalize the correct measurement of pension liabilities: the market value of liabilities (MVL), which properly accounts for the guaranteed nature of public pension benefits.

Recognizing the unsustainable future of current public pension plans, many state legislatures are considering pension reform. Unfortunately, most proposed reforms are insufficient to fill the funding gap because government accounting standards continue to underestimate the true debt.