Human nature being what it is, it’s no surprise to me that local, state, and federal entities across our country continue to largely ignore the looming crisis of our public sector pensions. More often than not, politicians delay addressing this pressing issue to avoid potentially losing the support of voters. Afterall, it's always easier to kick the can down the road.
Unfortunately for the Motor City the day of reckoning has begun after an initial effort to block the efforts.
Let’s begin with a brief background on what a public sector pension is and how it operates. For this post, we will ignore private sector pensions which are similar, but are guaranteed by the Pension Benefit Guarantee Corporation, and whose shortfalls do not theoretically fall on the taxpayer. Pensions are offered to public sector employees as part of a package of retirement benefits to be received in the future. The employing government agency sets aside (or should set aside) ample funds to cover these future obligations.
However, as is the case for many things that can be put off, funding frequently is, or is not made in large enough amounts. The liability is an actuarially calculated value based upon the total liability less total funding to date. Total funding is easy to pin down, the liability is more nebulous and takes into account factors such as life expectancies, salaries, compounded growth on funded assets, etc. A recent PEW study found a fiscal 2009 shortfall of $217.2 billion in unfunded municipal retiree liabilities including pensions, health care, and other across 61 of the most populous cities in the U.S. Bear in mind this is for local municipalities only and does not include State and Federal obligation.