Pennsylvania Governor Tom Corbett has stormed the state with the message that public pensions are bankrupting the state.
But Joe Markosek, Democratic chair of the House Appropriations Committee, says that Corbett is wrong.
Corbett’s $3 billion in education cuts has hurt every district in the state, far more than pensions, forcing districts to raise property taxes to keep their local schools open.
Diane Ravitch's blog 
Moody’s just cut Pennsylvania’s GO rating and mentioned their “large and growing pension liabilities”.
xxxxxxxxxxxxxxxxxxxxx Read the link. Very thorough review of the situation.
This is the second prong of the two-pronged attack from the 1%. Prong 1 was the movement to demonize and destroy unions in order to reduce wages, workplace protections, and benefits permanently. Prong 2 is to destroy the very idea of pensions and the safety net including Social Security and Medicare.
Once the middle class is thus destroyed The USA will become like Mexico, with a small, very wealthy elite and the rest of us get to live in hardscrabble poverty serving our betters. It is an old, old story throughout history, often repeated.
what is the governor costing the state? lets see what he makes and takes.
Markosek: “The Corbett-Tobash pension plan failed to gain traction in the legislature for good reasons: it does not produce any near-term budgetary savings for the state or school districts, nor does it pay down the pension debt any faster than the reform plan the state has in place (Act 120 of 2010).”
Well, that’s the thing about defined benefits: they’re defined. No pension plan can produce significant “near-term budgetary savings,” unless the plan is to immediately cut benefit payments to current retirees.
xxxxxxxxxxxxxxxxxxxxx True enough. However the same link describes how they got in trouble, & a recent pension reform that will dig them out step by step over 20 yrs if mind their p’s & q’s– which it appears Corbett has not been doing, & proposes to continue borrowing from P to pay P for another few yrs. The 40-60% slashes he’d like to make in pension benefits for newcomers would not begin to affect tax levels for decades. His proposal to close it & switch to 401k would cost 10’s of millions in speeded-up payment– which he hasn’t been making anyway.
Sounds to me like a lot of sound & fury trying to distract attention from the mess he’s made of PA finances onto the usual irrelevant but popular whipping-boy.
Okay, update. They’ve issued a stay, so this Ohio charter school either will or will not remain open, depending on how one interprets the judge’s order.
These kids are going to be very, very nimble and adaptive for the “workplace of the future”, I’ll tell you. They have no earthly idea from one day to the next where they’re going to school.
I’m waiting for the judge who refuses to take one of these lawsuits. Judges shouldn’t be crafting Ohio’s public education law on the fly and on a case by case basis. It is ridiculous. I know it’s politically risky for our lawmakers to anger the lobbyists and actually draft and pass some laws and regulations, but how long can they “relinquish” their duties like this? The market doesn’t seem to be working. They might want to step in at some point.
http://www.cincinnati.com/story/news/2014/07/21/vlt-may-not-stay-open-after-all/12941397/
Look for some more OpEds from think tanks. In NJ, the current group that thinks it doesn’t stink is the Common Sense Institute. Whatta group of somebodies (they think they are). They just may have Christie in their pockets. I can’t tell who works for whom in the propaganda dept.
Does Corbett have a pension?
Has anyone counted the cost of pension reduction/theft where it has happened? How does it save the state money to have retirees, often not covered by social security, suddenly losing income? How many of Detroit’s water-debtors are retirees whose pensions have been stolen?
In the delusional world of American economists, as Krugman labels it, the spending of the 1% warrants reverence, because it affects the economy. Until recently, the pension chicken littles, at the national level, selectively ignored the effect of both income spent and tax revenue generated by pensions. Unfortunately, the states conveniently remain deaf to the more nuanced and accurate information on the subject. The roar of campaign contributions, revolving doors and lobbyists has resulted in hearing impairment.
There is research on the value of pensions to state economies at the National institute for Retirement Security
Good piece on whether the ed reform Third Grade Reading Guarantee will make the Common Core tests high-stakes, despite repeated assurances to parents that the CC tests will NOT be high-stakes for children.
Getting left back in third grade is pretty “high stakes”, I’d say.
I figure it will be battle between the “accountability” political caucus in ed reform versus the “Common Core” political caucus in ed reform.
We’ll see which group of ed reform lobbyists wins! Oh, and we’ll also find out what happens to millions of third graders when they get their Common Core test scores. Might be high stakes, might not! No one knows!
http://www.politico.com/story/2014/07/jeb-bush-florida-education-reading-rule-108958.html
I just did some a couple Google searches, and yep, as in so many other states and cities, the big structural problems in Pennsylvania’s public employee pension system can be traced to the 2000-2001 time period, and the decision to enact big, retroactive benefits enhancements without paying for them. A good rule of thumb: When anyone refers to a “surplus,” reach for your wallet.
The case of Pennsylvania is a bit unusual in that the big enabling event for the gutting of the pension funds was an attempt by state lawmakers to jack up their own pensions. That provided the hook for the unions to sign on, presumably with the understanding that if their members were included in the deal, they wouldn’t harp on lawmakers’ self-dealing when they were up for reelection.
* * *
Legislators raise own pensions
50% increase; less for workers, teachers
Wednesday, May 09, 2001
By John M.R. Bull, Post-Gazette Harrisburg Correspondent
HARRISBURG — Without a word of debate yesterday, state lawmakers increased their pensions 50 percent and granted lesser increases to all state employees and public school teachers.
The vote capped weeks of furious deal-making between legislative leaders and Gov. Tom Ridge.
Ridge said he would sign the pension increase into law if lawmakers passed his proposed budget for next year, ended the stalemate over how to spend $11 billion in tobacco settlement funds, put $10 million into the pension fund and passed a series of education reforms that Ridge proposed.
Legislative leaders made short work of his education reforms on Monday, passing them in the House and Senate so fast that some lawmakers cried foul because that occurred in just a day, bypassing the usual months of hearings and committee deliberations.
The education reforms included the establishment of so-called “independent schools,” grants of $500 per family to pay for the cost of tutoring failing students, and a $30 million tax credit for corporations that fund scholarships and other programs at private and parochial schools.
The reforms were passed to set the stage for yesterday’s vote on pensions. Lawmakers have sought a better pension for themselves for decades.
The original plan was to give lawmakers a 50 percent increase to their pensions, which will bring their pensions to the same level as district justices. Under the bill, a lawmaker earning $61,980 a year for 20 years would qualify for a pension of $37,188 a year, compared to $24,792 previously.
But Ridge refused. All state workers had to be included, he said.
So the 109,000 state employees were written into the bill to receive 25 percent increases to their pensions, with a 1.25 percent increase in employee contributions.
Democratic leaders last weekend successfully added 234,000 public school teachers to the pension bill, granting them 25 percent increases too, provided the contribution rates of most teachers rose 1.25 percent, to 7.5 percent of their salaries.
The pension increases do not apply to any retirees, but a provision in the bill does increase the monthly medical cost reimbursements for some retired teachers from $55 to $100.
Patsy J. Tallarico, a mathematics teacher from the New Kensington-Arnold School District and president of the Pennsylvania State Education Association, said in a statement, “School districts will save money in salary by replacing retiring teachers with younger and less-costly employees. They can use the savings to enhance educational programs and to limit local property tax increases.”
Tallarico said it was not the union’s choice to link the education reforms to the pension bill.
“We worked very hard with legislative leaders to address our concerns. We achieved as many positive changes as were possible. We then focused on ensuring that PSEA’s members were included in the pension multiplier increase. In exchange, we agreed to consider legislators’ entire voting records in the next election rather than this specific vote.”
Lawmakers justified the pension increases by noting that the pension funds for both state employees and the one for public school employees are bloated with earnings from the booming economy of the 1990s.
“It’s not a raid on any taxpayer money. It is funded by the surplus in the pension fund and increased contributions from state employees, lawmakers and teachers,” said Mike Manzo, aide to House Minority Leader H. William DeWeese, D-Waynesburg. “There were times, obviously, when it looked like it wouldn’t get done. Any vote like this is always tough.”
One byproduct of the increased pension for lawmakers, noted House Majority Leader John Perzel, is that it would encourage older legislators to retire now and take the increased pensions.
He estimated that 20 to 30 of the state representatives will likely retire soon after the bill is signed by Ridge, meaning the pension increase could act as a de facto term limit on lawmakers. In return for higher pensions, lawmakers’ contributions will rise from 5 percent to 7.5 percent of their salaries.
Lawmakers have bucked for an increase to their pensions since 1975.
Teachers’ pensions hadn’t changed substantially since 1958. Perzel said there was not enough money to grant teachers larger pensions and a provision to allow full retirement at 30 years of service, which many older teachers had zealously advocated.
“We can’t do both because we don’t have enough money or enough teachers,” said Perzel. Too many teachers would retire with a 30-and-out provision, and the increase to their pensions gives most teachers a better deal in the long run, he said.
The bill passed the House 176-23, without a word of opposition and no debate. It took five minutes to approve, then ship to the state Senate for consideration. An hour later, the Senate approved the bill, 41-8, without discussion, and sent it to the governor’s desk for his signature.
“I came to Harrisburg to do what’s best for the people of Pennsylvania and grabbing a larger pension for myself doesn’t seem the best way to do that,” newly elected state Sen. Mike Stack, D-Philadelphia, later said in explaining his no vote.
“I do think the teachers and state workers are deserving of a pension increase, and I was more than ready to support legislation that did not include legislators. That would have been an easy decision to make.”
Ridge will sign the bill next week, when he returns from a trade mission to Poland, said his spokesman, Tim Reeves.
“We have agreements with the Legislature on the other provisions, and we are confident they will be met,” he said.
You are missing the true cause Flerp! Way back in the 90’s governor Christine Todd Whitman decided to forego paying the state’s portion of the pension fund payment and called it a budget balancer. The idea caught on and other governors followed suit since she got by with it. The states have underpaid their obligations for 20 odd years. That has to be a significant if not major cause of the fake pension crisis.
You also need to look into how the funds were invested. Jeb! Bush as chair of the Florida pension fund invested heavily in Enron and Lehman Bros. right before they crahed.
I don’t believe in “true causes.”
Certainly the game of surplus-raiding (through benefit sweeteners, pension holidays, or both in tandem) has gone on for decades. For Pennsylvania, the things that were done in the early 2000s were devastating. I’m not making this stuff up, you can find it online in 30 seconds. The Pennsylvania state teacher’s retirement fund was arguably reasonably well-funded in 2001 (although of course relying on the still-overinflated valuation of stocks at the time). After 2001, the state lost control and has never caught up. Even today, Corbett is proposing several more years of pension holidays.
I don’t know what the solution is. You can pass a law that requires minimum contributions and conservative accounting. But legislatures can pass a law that says “we’re not going to do that this year” if they want to. We’ve seen it over and over. What’s to stop them, a popular uprising by voters who demand to pay higher taxes? Perhaps in a coalition with another bloc of voters who demand to have their services cut? It will not happen. It’s a structural flaw.
Another possible solution would be to stop passing laws that retroactively increase retirement benefits for existing workers without an immediate, total true-up that matches the net present value of the new obligations. That also will never happen. Whenever a “surplus” appears, it will be taken.
Another solution would be a defined contribution system. Teachers are fully paid for teaching in the year that they teach. No worries about vesting, no having to choose between moving out of district/state and giving up so much of your compensation.
I tend to agree, TE, although I would probably oppose that if I were in the position of the teachers.
Flerp
Just trying to understand…
You are not “making it up” is this “made up”?
” in the 90′s governor Christine Todd Whitman decided to forego paying the state’s portion of the pension fund payment and called it a budget balancer.”
I have read this in several places.
Your googling more on target?
States and districts (like mine, who is currently being sued, I believe, for not paying its share into teacher retirements) failure to pay is not the issue?
Ang, this was a post about Pennsylvania, so I was writing about Pennsylvania, not New Jersey (or Florida). I can try my hand at googling the Jersey backstory. Jersey is notorious for pension underfunding. I would note, though, that I’m not aware of any state that gives the governor the power to “decide to forego paying the state’s portion of the pension fund payment.” It’s a legislative action, not a unilateral executive action. As such, it usually involves a lot of deals with the big interest groups.
For example, it’s very popular to say that “Tom Ridge decided to stop paying pension contributions.” Well, sort of, but not exactly.
Teachingeconomist – How does defined contribution address the lack of funding of accrued benefits?
The politics of this will be interesting – intense pressure for a Federal bailout on one hand and intense resentment against it on the part of taxpayers who will be asked to pay for public pensions much more generous than what they are getting.
You have to pay the accrued benefits unless you go bankrupt, exceedingly unlikely at the state level. It is what it is.
Perhaps states will need to receive authority to print money.
FLERP – Regarding your point about a “structural flaw” –
Quis custodiet ipsos custodes?
What Corbett is doing is what G. W. Bush did when he cut taxes, started two wars and increased deficit spending dramatically.
Cutting taxes below expenditures doesn’t work. I think Corbett has targeted the public pensions to kill them so he can balance the state budget on the backs of public workers, and then go into another round of cutting more taxes for billionaires and corporations.
My husband and I are both Retirees in the Pennsylvania State Education Retirement System — PSERS (1999 & 2000 before the increase). The legislators threw teachers a bone to keep us quiet while they received a 50% increase. At the time PSERS was funded at 124%. In 2002, Act 28 artificially capped employer contribution at 1.5%. Effectively, the only people contributing to the pension fund over the last decade have been the employees. Neither the state nor the school districts have planned for that inevitable rainy day. Now we are being demonized for their shortsightedness.
Yes,Here is what I found that affected the pension: “There were two historically bad market downturns from 2000-2003 and 2007-2009. Even though school employees never stopped contributing to the retirement fund, the Commonwealth and districts were granted employer contribution holidays. There were benefit increases granted a decade ago as noted above. The Commonwealth and districts face increased contributions because of the debt that has already been incurred.”
You don’t deserve to be demonized for taking what’s offered to you. I would have done the same. But everyone involved in the horse trading for that 2001 deal, including your union, knew what was happening. They were seizing an opportunity to sell at the top of the market. The surplus that existed in 2001 — which was only a “surplus” because it was baking in the massively inflated stock prices of that era, which by that point had already begun crumbling — *was* the rainy day fund. You can’t seriously accuse “the state” for failing to “plan for that inevitable rainy day” when it was your own union that fought to take the rainy day fund in exchange for some “education reforms” and its agreement to play ball in the next election cycle. Again, I don’t mean to insult you personally, especially because I would do the same thing in your position. But that doesn’t mean I have to live in an alternate reality.
Relying on the stock market to fund pensions is highly dangerous.
Oh, also, in 2002, as part of the same bill that capped employer contributions (aka “allowed the state to underfund”), retirees were given a cost of living increase in their benefits (also aka “allowed the state to underfund”). That right there is another horse trade.
But Pat in Pennsylvania, according to the wisdom of Flerp! and teaching economist above that’s unpossible! The state not making its fair share of contributions is not the cause, according to them.
Me, I agree with you 100%. I watched it happen live. I’m older than both of them so they ignore me as a cranky senior citizen, I guess, LOL.
It’s one of the causes. There are others. See above.
Chris in Florida is correct regarding Governor Christie Whitman robbing the pension system. I am no lawyer, but Governor Chris Christie recently announced that he was reneging on his promise to make a large payment into the pension fund.
I am of the opinion that Christie fronted exaggerated revenue projections to give the impression that a large payment would be feasible. Teachers have been required to make larger contributions. It is bait and switch. Christie refuses to tax his millionaire cronies.
We’ll soon be referring to the “former” Governor Corbett. Sadly, he will leave with a tidy pension.
As to cost of living increases, yes, my husband and I received a small one in 2002. My mother retired in 1978′ and had received one COLA before she died in 2001. PSERS awarded two increases in 36 years.
The book, Kentucky Fried Pensions, by financial columnist, Chris Tobe, places blame in Kentucky, on corruption and on the negilgence of the SEC.
For state and municipal employees of N.J. and N.Y., there is an interesting comment,
at the TIAA-CREF consumerism website (a consumer sharing site, independent of the company). The posting at the very bottom of the listings, July 21, 2014, by “Joel Franks”, in referring to defined contribution plans says, in N.J., “fiduciary standards are systematically ignored.” The result he identifies is a charge of $3,000 for a $100,000 investment. In N.Y., he identifies a charge of $400 for $100,000.
I make no assessment about the legitimacy or accuracy of the posting. “Joel Franks” does not reference a specific company in his post.
If I lived in N.J., I would be curious and I thought teachers at this site might have an interest.
Pension funds have say in financial markets. That is a problem for some people.
Oh, well, readers–“This Land is Your Land”…pension heists & non-funding of teacher pensions (as one of our ILL-Annoy legislators {proudly!} stated, “We didn’t steal your pensions—we just never paid into them!” while another told us, “Get over it!”) is ALL over this land, which is made for you & me! As a reduction in health care benefits was just shot down by the ILL S.C., & the unconstitutional SB 1 was passed by both houses of the ILL-Annoy legislature, we are eagerly awaiting the Plan B, which existed all along–put forth by a smart guy who would have been the ideal ILL gubernatorial candidate (had the state unions supported him/backed him).
I haven’t read all the comments, but is something missing from the discussion at every level even from the critics of public pensions?
Simply put, billionaires tend to hoard their money and put it mostly in investments that do not generate jobs but grow more wealth for the wealthy.
The working class mostly puts their money back into the economy paying rent, making mortgage payments, paying utility bills, buying clothing, food, going on vacations, etc.
How many jobs are created from millions of teachers still in the classroom and/or retired living off those pensions? What happens to those jobs when teacher pay goes down and the retirement plans are destroyed or diminished?
Correct me if I’m wrong, but I recall all the hype about the millions of jobs that were supported by the workers in the U.S. auto industry. Because of the number of jobs that would be lost through the domino effect, the White House used that as one justification for the loans that bailed out GM and Chrysler—in other words, too big to fail.
In 2008, 880,000 jobs were directly tied to automotive manufacturing comprising 6.6% of the approximate 13.4 million manufacturing jobs in the US.
How many jobs outside of auto manufacturing did those 880,000 workers support as consumers?
There are almost four times as many working teachers. Add the number who are retired, and how many jobs do they support by being consumers? While attempting to find the number of retired, I did see about 800,000 mentioned in one report but nothing specific.
Jobs are created by consumers not by billionaires. A billionaire may invest in a venture that might launch a successful business, but if consumers don’t buy the products or services of that venture, it will join the huge failure rate of start ups and generate no jobs. I’ve read that the failure rate of new businesses in the first three years is 70 percent.
Destroy or diminish the buying power of the middle class and you destroy businesses and jobs.
Lloyd – Pensions are not self-funding. They don’t pay for themselves. They have to be paid for. Your economic ideas are fantasy.
Much like the rentier economy of the 1% is a fantasy. Trust funds and capital gains are also not self-funding. The 1% relies on wage theft and artificially low wages to maintain their ‘profit’ margins, do they not? They paid to make their fantasy real for now.
Money itself is a fantasy. You can starve the working masses for so long and then they rise up and refuse to recognize the worth of the money and the overlordship of the billionaires history tells us.
The dearth of new thinking and the fear of change is sad and very indicative of why we are in the mess we are in at this point in our history. An inability to rethink and reimagine is destroying us all, always claiming that change is impossible.
“An inability to rethink and reimagine is destroying us all, always claiming that change is impossible.”
One difficulty for me is I have a hard time identifying what change people are proposing on this topic. I get the general sense of what end result people would like: good, well-funded pensions for public employees. I think that’d be a good thing, too. But what is the change that gets us from here to there?
Unfortunately wage theft is a significant portion of current retirement funds. Teachers that left before vesting lost an important portion of their compensation from the time they were teaching.
I think the best solution is to pay every teacher their full compensation in the year it is earned and put it out of reach of the political process. This will transfer some return risk onto teachers, but it will also remove some of the political risk that has now become obvious to everyone.
I think the biggest concern for many teachers would be that the political risk associated with the recalculation of “full compensation” to include compensation that was formerly deferred. Anyone can calculate the NPV of a full pension. And reasonable people can resolve disputes about what kind of discount should be used to capture the odds that the average employee would have stayed long enough to earn the defined benefits. But there may also be a political discount associated with the sticker shock of full compensation. The biggest downside of quantifying the present value of deferred compensation may be the risk that the number is too big for the public to accept. For example, I only recently learned that NYC spends more than $200,000 a year on the average NYPD officer. I will confess I was surprised. Imagine how the dynamic of this year’s contract negotiation between the PBA and the city might change if the newspaper headlines were something like “Union: $200K pay an ‘insult’ to cops.”
I’ll repeat this, phrased differently, because the teachers here might be interested to know this. As of a couple years ago, the wages of the average police officer in NYC were a little more than $100,000. The median is about the same. And police reach this compensation level between 5 and 9 years on the job. Total cost, including benefits, is at least double that.
Again, NYPD with fewer than 10 years on the job make as much as the current highest possible pay of a teacher in the NYC schools. No wonder Pat Lynch was scoffing at the new teachers contract.
It is always easier to reach an agreement if a third party is going to pay for a chunk of it. Hiding the costs of the agreement is also helpful.
Jim,
I think you are confused. It’s no fantasy that California’s CalSTRS pension program for public school teachers and administrators is funded by a monthly payroll dedication with matching funds from school districts and addition funds—when needed—from the state.
I can’t speak for the other states, because each one has its own public pension plans and its own challenges with corrupt or honest governments, but CalSTRS was created in 1913 and has never missed a payment. CalSTRS even survived the Great Depression without missing a payment.
In fact, due to $50 billion in losses To CalSTRS because of the 2007-08 global financial crises, Governor Brown recently signed Assembly Bill 1360 to bridge CalSTRS losses with nearly $75 billion from the state’s general fund with the goal to fully fund the program, as it was funded before the financial crises. Before AB 1360, the CalSTRS investment portfolio was worth almost 190 billion dollars.
CalSTRS is the nation’s second largest public pension fund with assets totaling approximately $189.1 billion as of June 30, 2014. The investment portfolio is broadly diversified into six asset categories.
You may want to read a post on this subject here: http://crazynormaltheclassroomexpose.com/tag/calstrs/
How many payments did Deteoit miss before things got bad?
TE,
There you go again changing the topic with a question. I wasn’t talking about Detroit. I was talking about California and CalSTRS, a retirement program that’s more than one hundred years old.
Are you implying that the corruption in the city of Detroit will happen in the state of California?
First, there is a difference in who governs in Michigan versus California. Michigan is almost totally controlled by the GOP, and I could make a strong argument with evidence that states controlled by the GOP tend to be less educated and more corrupt and violent than those controlled by Democrats.
You might want to read this post to see the foundation of my argument comparing the GOP to the Democratic Party and why what you may be implying is a leaky balloon full of hot air.
Lloyd,
Glad to know that you take the fact that California has never missed a payment as irrelevant. Past performance is never a guarantee of future performance.
“Past performance is no indication of future performance.”
This hold true for every nation, business and person on the earth. History proves that.
However, there is no indication that CalSTRS, California’s governor or legislature is doing anything to destroy that pension plan and rob several hundred thousand teachers of the retirement they earned through long, hard hours of work paid for by their own contributions to the plan.
All you have is your own opinion and that’s worth about as much as a handful of sand, while the private sector, Charter industry seems plagued with one scandal of fraud after another in state after state.
The thing that enables anti-public school politicians to get away with The Great Unfunded Liability Lie that public pensions are bankrupting states is because hardly anyone knows what an unfunded liability really and assumes that it’s an actual amount of money owed to a pension plan. It’s not. Here’s how an unfunded liability is calculated: Take a state’s current annual contribution to the pension plan; then, using appropriate actuarial factors, incrementally increase that contribution for each of the next future 30 years; finally, add up the total of all those 30 future years of contributions. That 30-year future sum is the “unfunded liability.” It’s not an actual current debt, but the public is led to think it is. The only number of any importance is the percentage the annual contribution is of the state budget. Typically, according to the Boston College Center for Retirement Research, it’s under 5% of the annual state budget and in now way will bankrupt any state.
You’re correct that the expected future liabilities that are included in the calculation of an “unfunded liability” are not “actual current debt,” but it’s not true that the actual, current debt is “the only number of any importance.”
Also, unfunded liabilities aren’t calculated the way you describe. An unfunded liability is what you get when the present value of a pension fund’s total liabilities, including its future liabilities, are larger than the assets that are in the fund right now. To the extent the liabilities are matched by assets currently held by the fund, those are “funded” liabilities. Liabilities that exceed the assets in the fund are “unfunded” liabilities. The total liabilities include (1) the benefits that have already been earned, (2) the benefits that are being earned in the current year, and (3) the benefits that will be earned in the future. The actuaries calculate the third part by running models using all their actuarial assumptions (life tables, expected length of employment, salary increases, etc.) and then discounting the total to its present value.
By way of a terribly constructed example: Say I’m a pension fund. My beneficiaries have already earned $1 million in benefits. (That’s an “actual, current debt,” as you put it.)
And say I expect my beneficiaries will earn an estimated $100,000 in the current year of Year 1. (That’s not an “actual, current debt” because it hasn’t actually been earned yet, but it is still a number of importance.)
And say that my actuaries estimate that in Year 2 through Year 30, my beneficiaries will earn $15 million. (I’ll treat it as a lump sum that shows up in Year 30 rather than as a set of annual flows, for simplicity’s sake.) My actuaries then determine that the present value of these future liabilities, using a discount rate of 7.5%, is about $1.7 million. That discount rate creates the most important assumption of the model: The assumption that $1.7 million today will be worth $15 million in 30 years. Or, in other words, the assumption that if I have $1.7 million in assets today, that’s enough to cover all my liabilities in Year 30.
So add them up: $1 million accrued, $100,000 for Year 1, and $1.7 million net present value for the future liabilities. Total liabilities = $2.8 million.
If I have $2.8 million of net assets, then I’m fully funded. If I have $3 million, then I’m over-funded. If I have $2 million, then I’m unfunded, with $800,000 of unfunded liabilities.
I suppose there are games you could play with whether you express the amount of the unfunded liability in terms of present value or future value. But the big dispute among the learned professors who argue about the size of pension funds’ unfunded liabilities is over the discount rate. Some say that because pensions should be treated as absolute and risk-free benefits, the discount rate should be based on the return of “riskless” investments like U.S. bonds. Others say it’s ok to base the discount rate on the expected returns in the stock and bond markets. The difference between the two approaches is enormous.