The recent stock market declines have made the challenges facing state and local pension funds even more acute. Reuters reports:
The erosion of assets at U.S. public pension funds since last summer is raising concerns state and local governments will have to increase their contributions to the funds to make up for shortfalls, leaving less for public services.
U.S. public pension funds count on returns of 7 percent to 8 percent a year to meet their liabilities, an ambitious target in a low interest rate environment.
“The contributions have gone up very substantially and we are headed toward them going up more again, creating really politically difficult choices,” said Donald Boyd, a state and local government expert at the Nelson A. Rockefeller Institute in Albany.
Though this year has, so far, had a bad start, prices have generally trended upward since the financial crisis. But that hasn’t been enough to shore up the nation’s over-promised and under-funded pension funds. Sooner or later, we are going to see another recession—where stock prices fall and cities and states lose revenue as their tax income falls. When that comes, expect a severe crunch: There won’t be enough money to maintain vital services and keep the pension funds going. Many cities and states will become increasingly difficult to govern as various interests compete for a declining share of public resources.
The deterioration in the financial health of so many American cities represents just one of the many ways in which an irresponsible political class is burning through the nation’s assets. The reckoning will come, and it will be ugly.