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There are three kinds of bad news: 1) bad news that’s about to happen; 2) good news that’s really bad news; and 3) bad news that’s out there in distance, where you can probably ignore it. Here’s a snippet of the 2nd kind of bad news, from the Pew Trust:
Primarily because of market gains, the state pension funding gap dropped in 2014, the first decline in reported pension debt since 2000. Lower investment returns in 2015, however, indicate that pension debt will increase when valuations for that year are complete.
But let’s talk about the third kind of bad news right now: state pension funds and their fairy-tale-like connection to reality. Thanks to new accounting rules, we’ve now got a pretty accurate snapshot of what we’re all facing:
The gap between the pension benefits that state governments have promised workers and the funding to pay for them remains significant. Many states have enacted reforms in recent years to help shrink that divide, but they also have benefited from strong investment returns.
Over the long term, however, these returns are uncertain. In addition, many states have not made contributions that would reduce plan debt under expected returns. New tools, such as net amortization, stress testing, and sensitivity analysis, provide policymakers with additional information to better evaluate the effectiveness of their policies and ensure that plans can achieve full funding over time—and that pension promises can be kept.
When combined with the shortfalls in local pension systems, this estimate reaches more than $1.5 trillion for fiscal 2015 and will likely remain close to historically high levels as a percentage of U.S. gross domestic product (GDP). The lesson here is that state and local policymakers cannot count solely on investment returns to close the pension funding gap over the long term; they also need to follow funding policies that put them on track to pay down pension debt.
“Funding policies” is shorthand for several things, but one of them is surely “tax increases.” And who will pay these increased taxes? Well, here’s a graph of the states that are in trouble and those that aren’t — and it’s hard to read, of course, but the trendline is clear: more states are carrying unfunded liabilities than aren’t, and it’s going to be awfully attractive for the next president (Clinton, Trump, Johnson, Stein, McMullin, Sharpton, Kardashian, whoever…) to want to bail out some of those seriously in-trouble states, which just happen to have juicy Electoral College votes. States like California, Illinois, New York, Pennsylvania, Texas, Virginia, New Jersey…. a lot of places poor in pension solvency but rich in electoral power.
Here’s the Bad News:
Maybe there’s a fourth kind of bad news? The kind that isn’t really news at all?