According to the fifty-nine funds’ own financial statements, total unfunded liabilities to teachers—i.e., the gap between existing plan assets and the present value of benefits accrued by plan participants—are $332 billion. But according to our more conservative calculations, these plans’ unfunded liabilities total about $933 billion.The meat of what we did is this: Most state plans assume that their current investments will get about an 8% rate of return in perpetuity. So that means that they set aside less money now to cover the pensions that will be paid in 2015, 2020, 2025, etc. But the 8% assumption is wrong, we argue, for two reasons: First, recent history shows that it may be too optimistic. Second, investments that have an 8% expected rate of return necessarily carry some risk -- risk that the plan will actually fall short in a given year or even decade. And when a plan falls short, the burden falls to the taxpayer to make up the difference.
In addition, we have found that only $116 billion, or less than one quarter, of this $600 billion discrepancy is attributable to the stock market drop precipitated by the 2007 financial crisis. The Dow Jones Industrial Average would have to nearly double overnight to make up for the present underfunding of these plans.
States, unlike private companies, do not fold under. Indiana, which according to the authors has a DB pension plan for teachers that is only 42% funded, is not likely to go out of business and take its workers down with it. The state of Indiana can assume a riskier investment return for its pension fund than an employer like those mentioned above or any other modern private firm (and, just for good measure, it’s worth pointing out that Indiana assumes only a 3 percent real rate of return).This is all irrelevant. We're not saying that when states engage in risky investments, teachers then are at risk of not being paid their pensions. The problem is precisely the opposite: Teacher pensions are guaranteed by states that don't go out of business. But that doesn't make the risk magically go away. The risk just ends up being borne by the taxpayer. So if a state decides to blow all of its pension money gambling at a horse race, the teachers will still get their pensions, but taxpayers will suddenly find themselves paying higher taxes to make up the shortfall (or else seeing huge budget cuts to other important state services).
All this is lost on the report’s authors, who would prefer states lower their assumptions on stock market returns from about 8 percent down to 6, the standard rate used by corporations in their calculations. This would mean telling a state like Pennsylvania, which has accumulated a 9.23 percent return in the stock market over the last 25 years (as of February 2010), that its 8 percent investment assumption is too high.