That hot-button issue revolves around how much money public employers – and, by extension, taxpayers – will have to contribute to cover future payouts for member benefits. It is a key issue at a time of dwindling revenues and tighter budgets for states and local governments.
Pension funds get money from the returns on their assets and from members’ contributions. States and cities also pay into the funds, but their contributions are discounted based on how much money they think their investments will make over time.
The 100 funds Milliman studied used a median rate of return for their investments of 8 percent. But the recession slashed into the market, dropping actual median returns to just 3.2 percent for the last five years, according to data from Callan Associates.
The difference has prompted critics to claim that the funds are underreporting their unfunded liabilities, or the gap between what they’ve promised to pay retirees in the future and what they’ll actually have on hand to cover the benefits.
Critics have called for public pensions to reduce their assumed rates of return to as little as 5 percent or less, which would cause unfunded liabilities to soar and likely leave taxpayers having to cover the difference.
But without the change, critics say, future generations will be left to deal with a financial bomb.