States including California, Connecticut and Illinois have been borrowing to pay, or even deferring, their pension bills
The degree of financial malaise is highlighted by this story. It is a classic tail of rationalization of investment (present value of investment and interest rates) but if we apply common sense it just not stand up at all.
The public employers that borrow from the pension system essentially contribute less than they owe in a given year, and agree to repay the difference, with interest, over a decade.
The state’s borrowing plan allows public employers to reduce their pension contributions in the short term in exchange for higher payments over the long term. Public pension funds around the country assume a certain rate of return every year and, despite the market gains over the last few years, are still straining to make up for steep investment losses incurred in the 2008 financial crisis, requiring governments to contribute more to keep pension systems afloat.
Lets be quite clear here. Employees are going to get pensions in the future that are not related to their current contributions. They will be paid by debt that is not aligned with income.
This is not a diatribe against public service employees. This is a case against government using government borrowing power to create transactions outside the normal course of business, and contribute to the shadow government can that is being kicked down the road in America.
This shadow government borrowing that exists outside official country level government statistics is at best misunderstood, and at worst toxic.