Friday, April 15, 2016
A warning from Puerto Rico
Puerto Rico is struggling with a fiscal crisis stemming, to a large degree, from its unfunded pension liabilities of $46 billion. Unable to cope with this disaster, Puerto Rico's governor signed a bill allowing his government to stop paying its debt. He also declared a state of emergency at the Government Development Bank in hopes of preserving essential government services.
The results of these catastrophic pension debts should serve as a warning in the mainland United States, where state and local public pension debts are growing rapidly. It's hard to tell exactly how big these debts are because officials often disguise them by assuming unrealistic rates of investment returns and by using other accounting gimmicks. However, Standford University Professor of Finance Joshua Rauh recently calculated the total shortfall at an astounding $3.4 trillion.
If these funds begin going insolvent, the consequences would likely include pension cuts, big losses to creditors, government fiscal crises, and damaging ripple effects throughout the wider economy. In fact, some pension fund officials seem to think they don't need to stabilize their finances at all—because if they do go bust, they believe the federal government would bail them out rather than deal with the ensuing disruptions.
I'd like to impose some discipline on these officials and rid them of their fantasies of a taxpayer-funded bailout. That's why I recently reintroduced the Public Employee Pension Transparency Act in the House of Representatives. The bill would do two main things: give state and local pension funds incentives to stop using accounting tricks when reporting their liabilities, and prohibit the federal government from bailing out any of these funds.
It's not too late to instill some accountability on public pension funds. Since many are unwilling to act responsibly on their own accord, let's give them some extra motivation.