Could Underfunded Public Pension Plans Pose A Risk To Real Estate Values?

retirement photo

Photo by Got Credit

Depending on the methodology that’s used to determine the underfunded position of state public pension plans, the number as of 2015 ranged from a staggering $1.7 trillion to an unfathomable $5.2 trillion!

To put that into context, the national debt of the United States is currently about $20 trillion.

But why is there such a great disparity in those two numbers mentioned above with one indicating an underfunded ratio of only about 26% ($1.7 trillion) while the other indicates an underfunded ratio of about 61% ($5.2 trillion).

It’s all about assumptions that are made concerning the returns earned on investments. ‘One accounting trick is the use of high discount rates, the assumed rate of future investment returns on fund assets, when calculating pension liabilities.’ (Source)

The pension funds assume a rate of return on invested assets of more than 7%, while the chart below courtesy of State Budget Solutions calculates underfunding using a more reasonable assumed rate of return equal to the 15-year U.S. treasury bond yield.

So Do These Underfunded Plans Actually Pose A Risk To Real Estate Values?

Assuming that at some point the proverbial fiscal can will no longer be able to get kicked down the road, the monies due to retirees will have to come from somewhere. In a worst-case scenario, Puerto Rico’s recent default most certainly had a pension component as the island has over $2 billion of Pension-Obligation Bonds outstanding.

So then, assuming that return assumptions are skewed too high, where will the monies owed by states and local governments to pensioners come from? We the taxpayers of course in the form of higher assorted fees, higher property taxes and higher other taxes.

In already high tax states like New York, the taxpayer can only bend so much before breaking, ultimately moving away to find lower state and local tax alternatives. Higher and higher personal tax burdens (and fees designed not to appear as taxes) means becoming a less desirable the location to live and work meaning that real estate prices would theoretically need to be adjusted to account for those facts (Nassau County Real Estate Closing Costs Set to Become New York State’s Highest!).

But, of course, politicians will do whatever possible to avoid this prospect and just keep on kicking!

Map Courtesy of ALEC (American Legislative Exchange Council)(https://www.alec.org/app/uploads/2016/10/2016-10-13-Unaccountable-and-Unaffordable.pdf)

Chart Courtesy of ALEC (American Legislative Exchange Council)(https://www.alec.org/app/uploads/2016/10/2016-10-13-Unaccountable-and-Unaffordable.pdf)

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