State and local governments across the nation are facing massive unfunded public pension liabilities, with estimates ranging anywhere from $1.1 trillion to $4.7 trillion. Fortunately, there is now a robust discussion about pension reform. That discussion has focused mainly on reforms to government employee retirement plans, such as changes to future pension benefits that have not yet been earned and shifts to defined-contribution or cash balance plans. Such policies are designed to make pension systems more financially sustainable and avoid additional unfunded liabilities, and they form a critical foundation of any serious pension reform effort.
However, to date there has been relatively little discussion about how to reduce existing unfunded liabilities. One problem is that any reform that would result in significant reductions in already-promised benefits to current workers and retirees understandably has little public support and may face major legal and political obstacles. That means municipalities and states with underfunded pension systems will, at some point, have to make additional contributions in order to meet their obligations.
From an accounting and legal standpoint, unfunded pension liabilities have not historically been treated in the same manner as general obligation bonds and other types of public debt. Yet, pension liabilities are implicitly an off-balance-sheet debt obligation of the government. As such, there is an urgent need not only to account for them properly but also to fund them in ways that impose the least additional burden on taxpayers.
One promising strategy that policymakers are starting to consider is the sale or lease of government assets-such as land, buildings, infrastructure or enterprises-and the use of proceeds to pay down existing pension debts and thereby put public pension systems on a healthier financial footing. This brief considers such an approach as a complement to comprehensive pension reform efforts that seek to reduce future unfunded liabilities by shifting away from traditional defined-benefit pension systems.