Public Pensions Under Stress

Federal Reserve Bank of Cleveland

The financial crisis has made it all too clear that regulators failed to see into the dark corners of the financial system. With that in mind, the Federal Reserve Banks of Cleveland and Atlanta have formed a Financial Monitoring Team to study pension funds and municipal finance with an eye toward implications for the wider economy and financial system. What concerns should we have? In this article and other articles from this spring issue of Forefront, we explain where risks could be building and how reforms might help forestall their impact on the broader economy and financial system.

Since 2007, state and local governments have been caught in a perfect storm. The confluence of the severe recession and the collapse of the housing bubble dramatically slashed tax revenues. Although some revenue sources have rebounded with the economy, the decline continues for others. Property values, a major source of funding for local governments, remain especially depressed.

The toll has been particularly heavy on public pensions, whose troubles with chronic underfunding predate the financial crisis. By one estimate, the nation’s 126 largest public pensions were underfunded by at least $800 billion in 2010. By another, 54 percent of the country’s state and local plans will have exhausted their funds as early as 2034.

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