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Study Taxpayers Owe Teacher Pensions $933 Billion

April 14, 2010
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Related Topics: Financial Impact, Benefit Design and Communication, Retirement/Pensions, Latest News
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Teacher pension obligations are almost three times greater than states and cities realize or are willing to admit, according to a new report by the Manhattan Institute.

A study of 59 pension funds that cover most of the public school teachers in America reveals that state and local governments reported underfunding teacher pension plans by $332 billion. But the gap between existing plan assets and the present value of benefits accrued by members is actually about $933 billion, according to an analysis by the conservative think tank.

The stock market would have to nearly double overnight to make up for the present underfunding of the 59 plans, its report said.

All 59 funds studied faced shortfalls, although the New York State Teachers’ Retirement System ranked as one of the better-funded plans, trailing only plans in Washington, D.C., and North Carolina, according to the report.

The New York state fund is 77 percent funded, well above the national average of 54 percent, according to the analysis in the report. Nevertheless, New York still has a $25 billion gap that needs to be made up.

“New York state has been more conscientious than most about making required contributions into the fund,” said Josh Barro, one of the report’s authors.

The Teachers’ Retirement System of the City of New York is in much worse shape, funded by only 46 percent, well below the national average. The city’s funding gap is $36 billion, according to the report.

“New York City has shirked its responsibilities to a significant extent,” Barro said. “By making promises of benefits without depositing money needed to cover them, it is effectively borrowing.”

A spokesman for New York City Comptroller John Liu responded: “The city continues to meet its pension contribution obligations as determined by the actuary.”

The report argues that officials around the country are assuming, on average, that their investments will appreciate at about 8 percent per year for an indefinite period. The funds “discount” the costs of paying benefits in the future because they assume that the values of stocks will be much higher by the time benefits have to be paid out years from now.

The authors argue that the assumption permits elected officials to contribute fewer dollars to the plans, enabling them to spread the money throughout their budgets and avoid cuts.

“It is not a reasonable way to estimate out-year pension liabilities,” the report’s authors argue. “This is because states are not able to pass along any of the risks associated with these higher returns to plan beneficiaries.”

California has the largest unfunded teacher pension liability, at almost $100 billion, according to the report, while West Virginia is the worst-funded plan, at only 31 percent.  

Filed by Daniel Massey of Crain’s New York Business, a sister publication of Workforce Management.

 

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