States together face unfunded pension obligations that, when using the risk-free discount rate,total $3 trillion. But, what happens when local pension plans are factored in? That number gets larger by an estimated $574 billion.
Robert Novy-Marx and Joshua Rauh apply the approach they took to valuing state pensions to two-thirds of all municipal plans in a newly-released paper. In doing so, they find that as of June 2009 the unfunded obligations in municipal plans rises from $190 billion to $383 billion. Extrapolating this finding to the other one-third of plans not included in their sample lead the authors to the $574 billion estimate.
Several cities will run out of assets to pay beneficiaries over the next ten years. These include Philadelphia, Boston, Chicago, Cincinnati, Jacksonville, St. Paul and New York City. The trade-offs for policymakers on this level are stark. Meeting obligations means compromising basic city services.
And just as municipalities are increasingly seeking state aid to cover local debt payments, local pension debt will also flow upward to the states. Rauh notes in an interview with Bloomberg that political pressure will push pensions debts on to already stressed states. States will likely turn to the federal government leading to “a debt crisis of some kind for a subset of U.S. state and local governments” in the next five to ten years.
The Washington Post reports that Philadelphia Mayor Michael Nutter is advocating for pension reforms including switching workers to defined contribution plans.