Pension funds

It's no secret that public sector pension obligations threaten to drown taxpayers in coming years.

It's already happened in California, where the San Francisco suburb of Vallejo declared bankruptcy earlier this year because it couldn't pay the generous salaries and retirement benefits it had guaranteed its police and firefighters.

In 2006, some 40 percent of public sector pension plans were found to be underfunded, up fivefold from 2000, The Washington Post reports.

But is the problem actually worse than reported? It appears so.

The Post noted last week that the American Academy of Actuaries may revise the accounting methods public pension funds now use to calculate how much money they must invest to meet their long-term obligations.

If that happens, hundreds more funds could be identified as underfunded, possibly forcing tax hikes to make up the shortfalls.

It seems that those who run public pension funds may currently use more optimistic assumptions involving rates of return than those allowed in the private sector. Most assume their investments will earn 8 percent. "That is about twice the market-based rate that private firms are allowed to use under federal regulations," The Post reports.

The new regulations would force public pension fund managers to use the same assumptions now demanded of those in the private sector.

"A market-based estimate provides the truest measure of the burden on taxpayers of providing the pension benefit in question," David Wilcox, deputy director of the division of research and statistics at the Federal Reserve, told the Post.

Predictably, those who run public sector plans don't like the proposed changes, accusing the AAA of being in bed with Wall Street, given that some firms might make money helping the funds make the necessary switch.

But that's a red herring. Sure, some public pension funds may already use more conservative assumptions. Good for them. But what really riles these fund managers is that under the new rules, some of them would no longer be able to hoodwink taxpayers by exaggerating the health of their public pension funds.

And if that happens, they just might find the barbarians at the gate.