New rules for calculating pension fund liabilities will exacerbate tensions between public employees and municipalities that could be left with less money to repair roads, run libraries or pay for recreation programs.
The bond rating firm Moodys and the Governmental Accounting Standards Board are altering the way in which pension funds calculate their return on investments. It is one of the three major sources of funding that drives decisions on taxpayer pension-related expenditures and employee contributions.
Most government funds have assumed a 7 percent to 8 percent rate of return on their investments. The projection reduces how much public employers and employees have to contribute to keep the plans solvent, or ensure that they have sufficient long-term funding to meet their commitments.
Critics have long argued that the 8 percent return is unrealistic, especially in todays economy. The revised accounting rules will limit or lower the rate of return on pension fund investments. Together they will create a huge funding gap.
Moodys estimates its revisions will triple the gap between what states, counties, cities and other municipalities report they have in funds and what they have promised to pay current and future retirees.
Moodys projects, on paper, a $2.2 trillion unfunded liability. The increased liability could affect bond ratings, making it more costly for states and municipalities to borrow money for capital improvements.
An $83 billion pension gap is one reason Standard & Poors Rating Service on Wednesday cut its credit rating for Illinois. Moodys already rates the state the lowest in the nation.
The revisions will also leave municipalities less money to spend on other public services. They come when local governments are struggling to cope with reduced tax revenues and less government assistance.
The new rules will increase pressure to divert strained resources to already skyrocketing retirement costs at the same time public employers have to confront soaring retiree health benefits. Nationally, burdensome pension costs have pushed some cities into or near bankruptcy. Stockton, Calif., listed $147 million in unfunded pensions when it filed for bankruptcy in June.
In recent years, New York has twice modified its pension system to restrain long-term costs. Other states are considering measures to overhaul generous pension plans.
Public employee unions have clashed with government calls to increase their premium contributions to absorb a greater share of the cost.
The revised debt calculations will not alter pension systems or what is owed. But a more realistic estimate of the funding gap will force states and local governments to re-examine their ballooning pension costs.