New Study Predicts Dire Outcomes for Pension Systems in Major U.S. Cities and Counties

Tuesday, October 12, 2010
By Paul Martin

Kellogg School of Management professor estimates that cities and counties add $574 billion to the $3 trillion in unfunded liabilities from the states

PRNewswire.com

Oct. 12

Prior research by the Kellogg School of Management has found $3 trillion in unfunded legacy liabilities from state-sponsored pension plans. However, new research finds additional liabilities from municipalities which magnify the growing public pension crisis. In a new report issued today by the Kellogg School, economists estimate an additional $574 billion in unfunded liabilities from pension plans at the city and county levels.

The paper, “The Crisis in Local Government Pensions in the United States,” is co-authored by Joshua Rauh of the Kellogg School of Management at Northwestern University and Robert Novy-Marx of the University of Rochester. In this latest study, Rauh and Novy-Marx calculate the aggregate unfunded liabilities and forecast the number of years assets will last for 77 defined pension plans sponsored by 50 major U.S. cities and counties. The sample represented all non-state municipal entities with more than $1 billion in pension assets, covering 2.04 million local public employees and retirees. Rauh will present the paper at the Brookings Institution on Oct. 15 in Washington, D.C.

“This new paper calculates the present value of local government employee pension liabilities for about two-thirds of total local government employees, and estimates the unfunded obligation for the remaining one third of workers covered by municipal plans not in our sample,” said Rauh, associate professor of finance at the Kellogg School. “In total, we estimate that municipal plans in the U.S. are carrying $574 billion in off-balance-sheet debt in the form of unfunded pension obligations.”

In many cities, these unfunded promises will be a long-standing and substantial burden for municipal revenues. For example, even if all other spending was shut down, the city of Chicago would need to allocate about eight years of dedicated tax revenues to cover pension promises it has already made.

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