America’s Urban Distress: Why The Public Pension Problem Is Worse Than You Think

In January, the Pew Charitable Trusts published a study showing that 61 U.S. cities have an aggregate pension funding gap of $99 billion and an additional shortfall of $118 billion for retiree health benefits. These figures were widely cited by the media in the aftermath of Detroit’s bankruptcy filing. They refer to fiscal year 2009, which was the latest year with a full data set.

Unfortunately, Pew’s analysis is ridiculously optimistic. Or, to be fair to the authors – who simply tabulated figures found in official reports – the ridiculousness is in the public data they used.

The problem is that the present value of future pension obligations can be just about anything you want it to be, based on your actuarial assumptions. And the most important assumption is the future investment return on the assets in the pension fund.

Ideally, the return assumption should be, well, achievable. You should be able to look at market yields and find investments that can deliver the assumed return.

Is this the case today?

Have a look at this chart comparing actual market yields to the median return assumption in a database of over a hundred state and local government pension plans:

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