It’s not just California, which we have reported on at length in the last week: State-run pension funds across the country are facing a sustained earnings shortfall that threatens to rattle the foundations of America’s public sector. The Wall Street Journal reports:
Long-term returns for U.S. public pensions are expected to drop to the lowest levels ever recorded, portending deeper pain for states and cities as a $1 trillion funding gap widens.
Twenty-year annualized returns for public pensions in the U.S. are poised to decline to 7.47% once fiscal 2016 results are released in coming weeks, according to an estimate from Wilshire Trust Universe Comparison Service, which tracks pension investment returns. […]
The drop in 20-year annualized returns is significant because officials who oversee retirements for police officers, firefighters, teachers and government workers have long said one bad year or two isn’t as important as the long-term average, and they would earn enough money over decades to pay for retiree obligations.
The grim numbers are a reminder that while the Federal Reserve’s (probably wise) decision to keep interest rates low may be staving off recession, it also threatens to compound the severe fiscal strain on many states and localities, which made transparently unsustainable promises to unions back when pension funds were temporarily raking in white-hot returns in the 1990s and early 2000s.
The window for can-kicking is closing. A few more years of slow returns will finally force radical adjustments to state and local public finances, pitting public sector unions (the core of Democratic political organization at the sub-national level) against competing budgetary priorities, like education, healthcare, and infrastructure. At a time when political coalitions and alliances are already up in the air, the looming “blue civil war” threatens to mix them up even further.