The reason every week seems to bring more stories about the alarming shortfalls facing one or another of our nation’s state and municipal public employee pension plans is the new accounting standards that will take effect in 2008. These new disclosure rules, which were set by the Government Accounting Standards Board in 2004, will force government accounting of pension liabilities to adhere to the same rules in place for the corporate world. Some jurisdictions have begun to produce numbers, and they indicate that the problems that lie ahead are huge:

On November 3, the Chicago Tribune reported that “Illinois’ next governor must grapple with a problem 30 years in the making: keeping retirement promises to more than 660,000 active and retired teachers and state workers.” It noted that the pension shortfall in the state was estimated to be $45.8 billion.

On November 17, the Associated Press noted that a new report showed that “West Virginia has promised but cannot pay $8 billion in retirement health care benefits to state employees—an amount that exceeds the nightmarish shortfalls in the teacher pension and former workers’ compensation funds combined.”

On November 20, the New Hampshire Retirement System warned that its retirement plan, which is the provider of benefits for retired firefighters, police, teachers, and state and municipal employees, is facing a $2 billion shortfall. Since the system is only 67 percent funded, the result may well be “significant property tax increases in communities around the state next year.”

A complete list would go on for pages. A recent article in the New York Times highlighted some of the difficulties facing all too many states and municipalities when it comes to meeting their pension obligations, describing some relatively small cuts that some municipalities have been able to make by finding loopholes in the laws governing pension obligations, but it noted that such cuts face all sorts of legal battles. At the same time, the New Jersey legislature, which has been searching for solutions to the onerous property tax rates in the state, addressed ways to ease the public pension obligations that are in part responsible for those tax rates. The recommended changes in the pension plans are aimed principally at new employees, including raising the age of retirement from fifty-five to sixty-two. While that kind of change is typical of the ideas put forth and, in some cases, implemented by other jurisdictions nationwide, some states are taking aim at what are considered by many unfair practices, such as workers compiling multiple salaries, each with a pension attached.

Every government facing this issue comes up with a variety of ideas, usually including changing the system from defined benefits plans to defined contribution plans for new employees. Nationwide, however, finding workable solutions to the issue of public employee pension obligations is unbelievably complex because America’s public employee pension systems cover some 17.3 million Americans who are participants in any of an astonishing 2,670 different state and local pension plans. According to the Council of State Governments, at the end of 2002, these plans held some $2.2 trillion in cash and investment holdings, and were making payments to more than 6.2 million beneficiaries.

Meeting the future obligation to those 17.3 million who serve their communities by providing services that often put their lives and health at risk or who have worked for less pay than they could have received in the private sector in return for long-term security for themselves and their families is part of the social contract between employee and employer (in this case, the government). But the reality is that a majority of the plans, as currently structured, are underfunded.

The exact amount of the underfunding is unclear because of the number of plans and the uncertainties about the strength of the investments made to ensure future returns—as well as the spiraling costs of the medical benefits associated with these plans, which are often a more immediate problem. A 2005 Wilshire Associates report found that 94 percent of state pension plans were underfunded. Wilshire notes that the situation for city and county systems is just as bad: “As of June 30, 2003 city and county pension assets totaled $148.6 billion, $30.6 billion less than pension liabilities of $179.2 billion.”

The New York Times article noted above reports that Mercer Human Resource Consulting estimates “when all the calculations are done, the nation’s states and cities will find they have promised a total of about $1.4 trillion.” It goes on to note that “little, if any, money has been set aside to fulfill these obligations.”

Despite these numbers, citizens tend to resist accepting the size and immediacy of the problem. For example, a January 2006 poll by the Empire Page.com/Siena Research Institute found that residents of New York State rank the problem last when asked:

“Thinking about the following issues, which do you feel is the most important issue that the Governor and Legislature should address in 2006?”

32% funding public education
17% the high cost of local taxes
16% reducing Medicaid costs
15% creating new jobs
13% rising energy costs
3% controlling the costs of public pensions
5% don't know/no opinion

Note that the problem was ranked lower than “Don’t know/no opinion.”

One would think that this lack of awareness would change when a drop in investment returns and a rise in benefits result in major increases in property taxes to meet pension obligations. But in New York, where this study was conducted, “75% of cities increased property taxes for 2005. The average increase in local property taxes over the past three years is 19.8%.”

Perhaps our blindness to the problem is because we tend to believe that these benefits are a sacred part of the social contract between citizens and those who provide such vital services, perhaps it is because lawmakers fail to highlight the problem since public employee unions have so much political clout and their endorsements are so important to them.

Whatever the reasons, this is not a problem that is going to disappear, especially given the aging of the population. And one of the biggest pieces of the problem is the extraordinary increases in the cost of the health care benefits that are part of pension obligations. That may be the area that needs to be addressed first—perhaps with a national health care plan.

Beverly Goldberg, a Senior Fellow and Editor-at-Large at The Century Foundation, is the author of Age Works: What Corporate America Must Do to Survive the Graying of the Workforce(Free Press)