Connecticut Unfunded Pension Liabilities Miscalculated, Report Says

Cause linked to unreported debt, unrealistic return expectations.

Connecticut officials are  underestimating the state’s pension liabilities by more than 50%, according to a report from Stanford University’s Hoover Institution.

The report, “Hidden Debts, Hidden Deficits: How Pension Problems Are Consuming State and Local Budgets” compares government measurements of pension costs and obligations to market valuations, concluding that the near $30 billion in 2015 pension liabilities is actually closer to $70 billion—more than twice the reported amount.

The reason for this dramatic miscalculation is unrealistic return expectations, which are used by government officials to calculate unfunded liabilities, the report said.

“These standards still preserved the basic flaw in governmental pension accounting: the fallacy that liabilities can be measured by choosing an expected return on plan assets,” the report’s author, Joshua Rauh, a senior fellow at Hoover, told the Connecticut Business and Industry Association. “This procedure uses as inputs the forecasts of investment returns on fundamentally risky assets and ignores the risk necessary to target hoped-for returns.”

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Rauh concluded that issues are also resulting from governments borrowing money from pensions and promising to repay the debt following retirement. Due to accounting standards and the assumption of high rates of return, a majority of the debt is unreported.

By using these unrealistic rates, the government is not only miscalculating, but misreporting the pension liabilities as well, the report said.

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Puerto Rico Produces New Pension Plan

Law approved without public hearings, retiree input.

Puerto Rico Gov. Ricardo Rossello signed a new pension law Wednesday that not only creates a defined contribution pension scheme, but also puts aside a $2 billion budget for retirees who rely on a system that is on its final legs.

According to the Associated Press, the government’s fund will now be tasked with securing pensioners paychecks. The current system has almost $50 billion in liabilities.

“If we had left things as they are, our retirees starting as early as September would not have received pension payments that they worked decades for in public service,” he told the AP.

This comes just weeks after a federal control board overseeing the commonwealth’s finances said a 10% cut to the pension system was needed due to Puerto Rico’s overall financial crisis. Rather than comply, government officials instead created their own law to aid retirees.

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According to retired union worker representatives, the new law was approved without any public hearings or suggestions from pensioners. They also warned of detrimental impacts retirees would face in the wake of any budget cuts.

“We have retirees who receive $500, $800 a month, and they can’t live off of that,” Dwight Rodriguez, president of a federation representing retirees of the Puerto Rican Workers Central union, told the AP.

Puerto Rico is in its 11th year of recession and currently faces a $73 billion public debt burden, which partially grew due to rampant borrowing from previous administrations  to cover increasing deficits.

The board has already voted to impose furloughs on all non-police government employees, starting in September. In response to the dismissals, overhead pension cuts, and the privatization of certain government operations, a large protest is planned for next week.

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