Don't Count on That Local or State Government Pension

April 17, 2017

(Chicago Tribune) - Millions of Americans are expecting to receive a pension from the city or state that employs them. Many will be in for a terrible surprise, according to the nonprofit organization Truth in Accounting.

It surveyed 237 municipal pension plans across the country, using newly required reporting data about pension underfunding. Although it has taken decades for many of these pension funds to get into such bad shape, only now are the details being revealed, says Sheila Weinberg, president of Truth in Accounting and a CPA who has dedicated her life to requiring full and useful disclosure of federal, state and local debt obligations. (I am a board member of Truth in Accounting.)

This newly collected data should be frightening to those counting on a state or municipal pension. The latest numbers are available at http://www.statedatalab.org/pensiondatabase. There you can search by state to find both state and local pension statistics. The report for each city and state includes the amount of pension plan assets, the amount of plan promises, and the dollar amount and percentage of pension underfunding. Every plan also receives a letter grade, from A to F.

Of the 237 cities studied, 29 received an "F" grade, reflecting a funding ratio of less than 35 percent. Those plans cover many thousands of workers who cannot possibly be paid their full promised pensions, absent a huge tax increase (which would also come out of their pockets as workers).

Based on the size of its unfunded pension liabilities, Chicago is in the worst shape, with more than $62 billion worth of unfunded pension promises. Chicago has less than 33 cents set aside for every dollar promised.

The Chicago Municipal Employees plan is estimated to run out of assets in seven years, since it is only 20.3 percent funded. The police fund (funded at 25.4 percent) and the firefighter's fund (funded at 21.7 percent) will not be far behind. The Public School Teachers' Pension and Retirement Fund is in slightly better shape with 51.6 percent funding.

New York City is in second worst shape in terms of total dollars needed, with an unfunded pension liability of more than $61 billion, but at least it is 71 percent funded.

At another extreme, Portland, Ore., has set aside less than 1 percent of what it needs to pay its $2.9 billion of pension promises.

How have these cities gotten away with underfunding their pension promises? Until last year, the Governmental Accounting Standards Board required state and local governments to report only a small fraction of their pension liabilities. And there have been no sanctions, other than public outrage, to force employers to top up their pension funds.


Many states, including Illinois, have constitutional provisions making it difficult to change pension formulas, such as cost-of-living increases. These laws have restricted attempts to substitute more appropriate defined-contribution plans, such as the 401(k) plans, used in most businesses.

In corporate America, there are rules requiring disclosure of pension liabilities and forcing increased contributions to underfunded pensions -- costs that are taken out of earnings. That's why most big corporations phased out their defined-benefit pension plans years ago. Instead, they offer 401(k) plans that allow workers to make their own saving and investment decisions, with matching contributions from employers.

If a corporation declares bankruptcy, the Pension Benefit Guaranty Corporation will pick up promised pension payments, up to certain levels. There is no such guarantee for state and municipal pensions.

Obviously, there are a lot of unfunded promises in America. The largest come from the federal government and are related to Social Security and military and federal worker retirement pension plans.

But it is easier for the federal government to get away with underfunding pensions -- because it can always print the money. Cities and states don't have that option. When their money runs out, a lot of retirees are going to be hurt. And that's The Savage Truth.