Wisconsin/Ohio/Indiana Suffer for Decades of Bad Decisions

Anyone that has taken any kind of accounting class knows that you can make the books come out just about anyway you want them to. In the case of states' accounting methods to balance their books, they have used all sorts of methods to postpone hard decisions that would reflect poorly on present administrations.

In the past, many governors have done what ever it took to avoid labor unrest, even to the determent to the state itself. But now, with so many states that have gone broke, it's time they have to pay the piper. Postponing the inevitable is over.

Well, the future is here and hard decisions can't be put off any longer. In states like Wisconsin, Ohio and others, the painful results of decades of bad decisions are on full display for all to see.

States' Accounting Practices Unsustainable
Source: Veronique de Rugy, "The State Pension Time Bomb," Reason Magazine, April 2011.

Nearly every state offers defined-benefit pension plans for public employees. Financed through a mix of employee and employer contributions along with the investment returns on pension funds, a defined-benefit plan represents a contractual obligation to dole out a set amount in annual payments for as long as the recipient lives, regardless of whether there are sufficient assets in the fund at the time of the employee's retirement.

One would think this obligation to pay no matter what would have led states to invest conservatively and plan ahead. Instead, they have been following accounting rules that pretty much guarantee the funds will be unsustainable, says Veronique de Rugy, a senior research fellow at the Mercatus Center.

First, by law, states are not required to pony up regular contributions to pension systems. Many states have deferred pension payments and used their share of the contribution to increase spending in other areas.

Second, government accounting standards systematically underestimate fund liabilities, which in turn encourages pension deferrals. States calculate the value of pension liabilities based on the returns they expect from investing pension assets; onaverage, the states assume an unrealistically high 8 percent annual return on pension investments.

Once the pension plans run out of money, the payments will have to come out of general funds, meaning taxpayers' pockets. If states want to avert that, they need to push through reforms as soon as possible. A first step would be to switch to accounting methods that show the true market value of their liabilities, says de Rugy.