Connecticut officials are underestimating the state’s pension liabilities by more than 50%, according to a report from Stanford University’s Hoover Institution.
The report, “Hidden Debts, Hidden Deficits: How Pension Problems Are Consuming State and Local Budgets” compares government measurements of pension costs and obligations to market valuations, concluding that the near $30 billion in 2015 pension liabilities is actually closer to $70 billion—more than twice the reported amount.
The reason for this dramatic miscalculation is unrealistic return expectations, which are used by government officials to calculate unfunded liabilities, the report said.
“These standards still preserved the basic ﬂaw in governmental pension accounting: the fallacy that liabilities can be measured by choosing an expected return on plan assets,” the report’s author, Joshua Rauh, a senior fellow at Hoover, told the Connecticut Business and Industry Association. “This procedure uses as inputs the forecasts of investment returns on fundamentally risky assets and ignores the risk necessary to target hoped-for returns.”
Rauh concluded that issues are also resulting from governments borrowing money from pensions and promising to repay the debt following retirement. Due to accounting standards and the assumption of high rates of return, a majority of the debt is unreported.
By using these unrealistic rates, the government is not only miscalculating, but misreporting the pension liabilities as well, the report said.