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Public Policy Group Calls For Risk-Free Public Pension Discount Rate

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Public Policy Group Calls For Risk-Free Public Pension Discount Rate

State governments could provide a clearer picture of public pension debt as it relates to state budgets by using a low-risk discount rate, said a new report from the Competitive Enterprise Institute released Wednesday.

Pension underfunding that leads to tax increases and reduced public services could be a disincentive to businesses, the report said.

Instead of using more optimistic discount rates for valuing pension liabilities, said study author Robert Sarvis, state governments should calculate their pension costs using a “low-risk” discount rate based on current Treasury bond rates.

Mr. Sarvis, an economist and former Libertarian candidate for governor in Virginia, analyzed several sources of public pension funding levels and re-estimated them at a “fair-market value.” In West Virginia, for example, underfunding jumped to 20% of gross domestic product from the 11.2% currently reported by state officials. Even a well-funded public pension climate like Wisconsin saw underfunding jump to 14.1% from 0.8% of GDP, using a risk-free discount rate for pension liabilities.