New rules expose bigger funding gaps for public pensions

Already-strapped state and local governments are coming under increasing pressure to reduce pension benefits or increase taxpayer contributions that help pay for them because of new rules that would require them to report those obligations more honestly, advocates say.

The latest rules come on line from the bond-rating firm Moody’s at the end of this month. They are projected to triple the gap between what states and municipalities report they have in their funds and what they have promised to pay out to retirees. That hole would stand at $2.2 trillion.

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For the worst-off cities, the new pension debt calculations could mean bond rating downgrades and increased borrowing costs when localities try to raise money for new projects, Moody’s has warned.

The accounting changes themselves will not force policymakers to alter how they fund pensions. But finance experts say that by simply highlighting greater funding gaps, the rules will intensify pressure on state and local governments to allocate more of taxpayers’ dollars to their pension funds. More likely, public workers may have to contribute more to their retirements or see promised benefits curtailed, measures that have already been implemented in more than 40 states.

Virginia and Maryland have cut benefits for new hires while preserving retirement packages for current employees.

“It is hard to believe that higher numbers would not put increased pressure on governments to deal with this,” said Scott D. Pattison, executive director of the National Association of State Budget Officers. “If you only have so many dollars, if you are going to put more into pensions, that means less for other things.”

The new rules come at a difficult time for state and local governments struggling with weakened tax revenue and stronger demand for services in the wake of the recession. In addition, states and localities face the prospect of substantial reductions in aid from the federal government beginning in January unless Congress and the White House come up with an alternative to automatic budget cuts.

The changes add to the growing tensions over the often generous retirement benefits that public employees receive. Union leaders argue the packages compensate for lower pay, but critics, including GOP governors, say the pensions are unfair and have become unaffordable for taxpayers.

“It is what we call pension envy,” said David Urbanek, spokesman for the Teachers’ Retirement System of Illinois. “You have an economy that is not performing the way people are used to. For a lot of people, their standard of living is being held steady or declining. Then they see a group of people getting pensions that they’ve earned and it makes them uncomfortable. They ask, ‘Why not me?’ Or, more to the point, ‘Why them?’ ”

Retired Illinois teachers earn annual pensions of a little more than $46,000 a year on average; they do not participate in Social Security under a state opt-out. Under the old accounting rules, their pension fund has $37 billion in assets and $81 billion in future liabilities — making it among the most poorly funded large public plans in the country.