ARE STATE PUBLIC PENSIONS SUSTAINABLE WHY THE FEDERAL.pdfVIP

National Tax Journal, September 2010, 63 (3), 585–602 ARE STATE PUBLIC PENSIONS SUSTAINABLE? WHY THE FEDERAL GOVERNMENT SHOULD WORRY ABOUT STATE PENSION LIABILITIES Joshua D. Rauh This paper analyzes thefl ow of state pension benefi t payments relative to asset levels and contributions. Assuming future state contributions fund the full present value of new benefi ts, many state systems will run out of money in 10–20 years if some attempt is not made to improve the funding of liabilities that have already been accrued. The expected shortfalls raise the possibility that the federal government will be faced with a decision as to whether to bail out states driven to insolvency by their pension programs. Keywords: public pensions, state budgets, fi scal policy, pension reform JEL Codes: H55, H72, H74 I. INTRODUCTION ust like the federal government, state governments carry substantial amounts of off- Jbalance-sheet debt. At the federal level, the off-balance-sheet liabilities are mostly for programs that cover broad segments of the U.S. population, such as Social Security and Medicare. At the state level, most of the off-balance-sheet debt comes in the form of pension liabilities owed to a narrower group of individuals: current and former public employees. In recent work, Novy-Marx and Rauh (2009a, 2010) have shown that the difference between state public pension liabilities and the assets set aside to fund them is substantially greater than the municipal debt recognized on state balance sheets. Dis- counting the benefi t cash fl ows at Treasury rates, for example, the gap between assets and already-promised liabilities in state pension funds alone was over $3 trillion at the end of 2008. This compares to $1 trillion in other forms of recognized state debt under U.S. Census Bureau measures.1 1 See