On Monday (2/21/11), ABC World News wanted to set the record straight on Wisconsin’s budget problems. As host George Stephanopoulos put it, the debate is over
whether pensions and other benefits for public workers are to blame for the crippling budget shortfalls in Wisconsin and other states. Tonight Barbara Pinto has a reality check.
What a relief–this is something that surely screams out for clarification.
The report starts with a quote from Republican Wisconsin governor Scott Walker. ABC‘s Pinto weighed in on his side:
Part of that problem, pension plans for America’s public workers that are under funded by at least a trillion dollars. Finance professor Joshua Rauh thinks the debt could be at least three times as much.
So the problem is a (nationwide) trillion-dollar deficit, or maybe it’s three trillion. What’s the other side of this discussion? ABC doesn’t seem to think there is one. They speak to a “state worker set to retire in December.” Said worker is asked to respond to the Republican complaint that “state workers like you are bankrupting them.”
Pinto mentions that ten years ago most states were in fine shape, but then by 2008 things changed considerably. Governor Walker “wants to control those costs, fixing the budget by breaking the unions’ power to negotiate over benefits.”
A reality check could have pointed out, as the New York Times did (2/19/11), that Wisconsin’s “pension fund is considered one of the healthiest in the nation, and it is not suffering from the huge shortfalls that other states are facing.”
So do those trillion dollar figuresmake any sense? And if everything was fine until 2008, maybe something happened around that time that would explain the current crisis?
Dean Baker of the Center for Economic Policy & Research provides some helpful context– the kind of information you would appreciate in a news report purporting to be a “reality check.”
There have been numerous media accounts in recent months warning of large shortfalls in public pension funds. Conventional estimates have placed the shortfall at around $1 trillion, while some analyses have put the shortfall as high as $3.2 trillion using a discount rate that implies pension funds will only earn the risk-free rate of return (Novy-Marx and Rauh, 2009). While there are important measurement issues in determining the size of the shortfall, it is also important that the number be placed in some context. Most people, including those involved in policy debates, will not have a good basis for assessing the meaning of a shortfall measured in the trillions of dollars that must be filled over an indefinite period in the future. The relevant context is the size of the projected shortfalls relative to the size of the state economies.
Before going through this exercise, it is worth noting that the size of the shortfall in many of these funds has likely already been reduced as a result of the fact that the stock market has continued to recover from its downturn in 2008 and 2009. On July 1, 2010, the S&P 500 was already more than 11 percent higher than its July 1, 2009 level (from 987 on July 1, 2009 to 1101 on July 1, 2010). Most funds use the stock market’s closing value at the end of the fiscal year as the basis for determining the valuation of their assets. Of course they also use an average, so the valuation would not simply reflect the market value at the end of the fiscal year. However, with the market having already risen substantially from its low (the S&P 500 had risen another 19 percent to 1293 by January 10, 2011), it is likely that pension valuations based on current and future market levels will show smaller shortfalls. In other words, a substantial portion of the shortfalls that were reported based on 2009 valuations have likely already been eliminated by the rise in the market.