One of the reasons public pension plans continue to be so poorly funded are Unrealistic Assumptions. There are numerous assumptions made by the investment and actuarial industries that serve public pension systems. Underlying these assumptions is pressure to use overly optimistic assumptions which translates to lower budget demands upon plan sponsors (i.e. states, counties, cities, school districts, etc.)
The Wall Street Journal has an article which highlights just one example of these overly optimistic or unrealistic assumptions. The median assumed investment return on pension assets is 7.25%. Over the past 10 years the actual median return was 6.79% and over the past 20 years the actual median return was 6.49%.
S&P has released an analysis of the per capita share statewide debt, pension liabilities and other liabilities (primarily health care liabilities). New Jersey has the highest per person liability at $27,293 and Nebraska the lowest at $242.
Kentucky officials plan to release an outline of plans to restructure the State’s severely underfunded pension plans. The Kentucky pension system is one of the most poorly funded plans in the country. The pension plan covering the State’s non-hazardous employees was 14.80% funded and the teachers’ plan was 35.22% funded.
The outline of the overhaul includes new employees being placed in a defined contribution plan (401(k) style). No information was made available about what changes the overhaul would include in an attempt to reduce the net pension liability covering existing employees and retirees.
The Economist has a powerful article about American public sector pension funds. The article is a good overview of the issues facing these defined benefit pension plans and some of the key assumptions that resulted in the current shortfall.
Trump administration budget chief Mulvaney stated in a BloombergPolitics article “I think what you heard the president say is that Puerto Rico is going to have to figure out a way to solve its debt problem.” Mr. Mulvaney went on to say, “We are not going to bail them out. We are not going to pay off those debts. We are not going to bail out those bond holders.”
Frequently overlooked in the discussion of the Puerto Rico debt crisis is the impact on bond insurers. Assured Guarantee and MBIA have not recently updated investors on their exposure to the Puerto Rico debt crisis. The most recent information available indicates that Assured Guarantee may have significant exposure to Puerto Rico debt.