Pension Battles Loom Across the U.S.

Chicago has balanced its budget, but only by selling the Skyway toll road, the city's major parking garages, Midway Airport. Now Chicago is in negotiations to sell the city's parking meters! Those one-time cash infusions are a tradeoff that will make it harder to pay tomorrow's pension promises.

It's a hot issue in every state. Kentucky reports a $30 billion gap in pension funding. Connecticut and Massachusetts have highly publicized state budget woes. And the stories keep coming. One of this week's PensionTsunami headlines: "Macomb County, Michigan, faces layoffs without $10 million in cuts to pensions and health benefits!"

Accounting legerdemain: The magnitude of the state pension shortfall has been hidden by accounting rules that allow pension liabilities to be discounted based on the "expected rate of return." Obviously, the higher the expected return is set, the lower the current pension contributions required. Given recent returns, most pension plans will be even more under-funded when they report on assets in the coming months.

Pension-accounting rules add to the problem. The riskier the assets in the pension plan (stocks are considered riskier than bonds), the higher the anticipated return they can use to make the plans look solvent. That encouraged many plans to become overweight in equities in the past few years.

Paying the piper: When it comes to making good on retirement promises, states have a far different picture than the federal government or public companies. The federal government can "print" money to pay its retirement obligations, including Social Security benefits. But municipalities can only borrow the money by raising taxes or selling bonds and other IOUs, or selling assets. It's not a good market for any of those solutions.