State Pension Plans Influence Real Estate Purchase Decisions
School districts used to be the number one concern among families shopping for a new home or relocating. Homebuyers may now realize that public pension & retiree health obligations are an essential measure of a state, city, school district or county’s long term financial viability. Businesses deciding where to locate a new plant, open an office, or relocate their headquarters also are likely to add unfunded public pension & retiree health liabilities to their checklist of selection criteria.
There is a "$1 trillion gap" between states’ pension obligations and the money that is set aside to fund promised benefits, according to the Pew Center on the States. Higher taxes, reduced service levels, and laid off city workers are increasingly common actions being taken at the local level as cities and counties struggle to close massive budget gaps caused in part by pension costs.
Camden, New Jersey, for example, made headlines in January of this year when it announced plans to lay off hundreds of city workers—including police and firefighters—in an effort to close a $26.5 million budget deficit.
-- State Pension Plans Exempt from ERISA --
Public employee pension and benefit plans are not covered by The Employee Retirement Income Security Act of 1974 (ERISA).
Corporations, which are subject to ERISA, are required to adequately fund pension benefits. Under ERISA, corporate pension funds must be held in a trust maintained separately from an employer’s operating assets. When these ERISA rules are followed, corporate pension funds are generally adequate to pay the accrued benefits.
Public plans do not have this ERISA mandate, and politicians have found it much easier over the years to promise higher benefits than to sufficiently fund the benefits. The result is the $1 trillion gap.
Accounting for Public Pension Plans
The Government Accounting Standards Board (www.GASB.org) is responsible to set guidelines for public pension accounting and financial reporting.
Corporate pension funds must calculate future pension obligations using a low risk-adjusted interest rate, typically 6%. This is not the case for public pensions. New Jersey, for example, applies an 8.25% discount rate to calculate unfunded pension liabilities. Using this measure, the state estimates $32 billion in public pension budget shortages. The same obligation, calculated with lower interest rates used by corporate pension funds, translates into approximately $145 billion.
“Pension costs will crush government,” warns a February 2011 report issued by the Little Hoover Commission titled “Public Pensions for Retirement Security.” Writing specifically about public pensions in California, the report notes that the 10 largest California public pension plans face a combined shortfall of $240 billion in 2010.
While industry guidelines suggest that a public pension fund be at least 80% funded, the Little Hoover report indicates that the Los Angeles City plan is only 62% funded and the San Francisco plan is somewhat better with 74% funding.
"State and local governments need the authority to restructure future, unearned retirement benefits for their employees," according to the Little Hoover Commission report.
Real Estate Purchasers Need to Understand Public Pension Funding
Pension professionals have been aware of the unfunded pension liability issue for some time, while the true dimensions of the problem are only recently gaining attention among the general public and popular press.
Public pension deficits vary greatly from state to state, and within a state, from plan to plan. Residents and real estate purchasers are well advised to acquaint themselves with public funding issues prior to making any significant decision in regard to relocation, a real estate purchase, or a sale.
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.