Another study has been released claiming the nation’sstate and local public pensions are undervaluing thetrue extent of their obligations.

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The latest analysis from the Hoover Institution says the 564pensions it studied, which represent 97 percent of all publicpension assets in the country, have collective unfunded liabilitiesof $1.91 trillion.

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But that number doesn’t tell the true story, thinks Joshua Rauh,a senior fellow at the Hoover Institution and author of HiddenDebt, Hidden Deficits.

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Actual liabilities are underestimated, based on theoverestimation of future returns on pension assets, writesRauh.

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The plans he surveyed expect an average annual return of 7.6percent. In order to generate those returns, pensions have taken“increased investment positions in the stock market and other riskyasset classes such as private equity, hedge funds, and realestate,” he said.

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Pension trustees base the ability to cover future liabilities onthe assumption returns will be “achieved with certainty.”

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Under GASB 67, which was firstimplemented in June of 2013, public funds that predict anexhaustion of assets must use a lower discount rate pegged tohigh-quality municipal bonds when assuming future shortfalls, andnot higher assumed rates of return.

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In fiscal year 2014, only 11 percent, or 63 of the plans usedthe lower discount rate. And when they did, they applied a ratethat was only 1.1 percent below the higher assumed returns.

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Rauh says the appropriate discount rate is a U.S. Treasury bondwith a ten-year maturity. At 2.66 percent, the aggregate unfundedliability jumps to more than $3.4 trillion, substantially more thanthe $1.9 trillion the funds are reporting.

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“This study shows that unfunded pension liabilities aredevastatingly widespread and only getting worse,” said Rauh, in astatement accompanying the study’s releases.

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“With hundreds of state and local governments drowning inretiree benefit debt, the need for bold structural reform has neverbeen so pertinent. We need to bring local and state governments’retiree benefits back to solvency before we see this vast epidemiclimit the ability of state and local governments to provideadequate services in areas such as public safety and education,” headded.

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Recently, Andrew Biggs, an economist with the AmericanEnterprise Institute, a Washington, D.C.-based conservative thinktank, was critical of data from the National Associationof State Retirement Administrators, which said annualtaxpayer contributions to pensions don’t comprise a “significantportion of state and local pensions.”

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Biggs also noted what he says are the inflated discount ratesapplied to public pensions.

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If public pensions were required to apply a discount ratesimilar to private sector pensions, governments would becontributing 20 percent of total taxpayer revenues to fund pensionsannually. NASRA says in 2013, government contributions to pensionsrepresented 4.1 percent of spending.

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Biggs also points out that public pensions are also allowed toamortize debt over a 30-year period, compared to private sectorpensions, which must do so over seven years.

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“When a government low-balls its contributions by assuming highrates of return on risky investments and then amortizes investmentlosses over 30 years, it’s doing nothing other than making futuretaxpayers fund the pension benefits that current taxpayers shouldhave paid for,” writes Biggs.

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“The reason [state and local] pension contributions areseemingly low is quite simply [because] these governments aren’tfully funding their pensions,” added Biggs.

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