PHILADELPHIA -- To Mathew McCubbins, municipalities are the walking dead.
The Duke University law and political science professor got even more graphic as he talked about public pension funding at the University of Pennsylvania's Van Pelt-Dietrich Library.
"Think of it in terms of a bunch of governments going around running up against fences being shot in the head. That's the picture that we're painting here, essentially," he said.
Embellishment aside, the unfunded liability landscape for states and localities isn't pretty.
Standard & Poor's managing director Robin Prunty, speaking at the same public pension conference earlier this month at the University of Pennsylvania's Penn Institute for Urban Research, referenced basket-case Illinois, home to an estimated $111 billion pension tab.
Quoting a report commissioned by that state's General Assembly, she invoked "moving toward crisis" and other red-flag buzzwords.
The report came out in 1917.
"This is not a new topic," Prunty said above ripples of laughter.
Discussions about public pensions, however longstanding, are taking on renewed vigor as the unfunded liability problem hovers over public finance. Bankruptcy resolutions in Detroit and Stockton, Calif., that favored pensioners over bondholders and rating agency downgrades to such battleground states as Illinois and Pennsylvania have intensified matters.
Jim Link, managing director at Philadelphia consulting firm Public Financial Management Inc., acknowledged the complexity of the problems but boiled solving them down to basics.
"Keep on talking and listening, and laying out realistic goals. That's what used to be called good politics and good legislation," said Link, who heads PFM's other post-employment benefits, or OPEB, sector and co-heads the firm's Center for Retirement Finance practice.
"At PFM, we don't see this as a one-size fits all," he said. "There are a lot of potential solutions, none of which are on the far left or the far right."
PFM's retirement unit advised on pension-compromise plans in Chattanooga, Tenn., and Lexington, Ky.
"It involved a lot of work, and a lot of blood, sweat and tears," said Link. The firm has also counseled the Tennessee treasurer's office.
Annual payments for police and fire retirees in 300,000-population Lexington had spiraled from $10 million in 2005 to a projected $48 million for 2013 before the city and unions struck a deal to reduce unfunded liability by 45%.
According to Link, Wisconsin, Utah and Tennessee have handled pension liability wisely. He praised Tennessee, in particular, as proactive.
"Although they were in very good shape, they saw some handwriting on the wall," he said. "Tennessee, absolutely, did a really good job. They didn't go in and gut the defined-benefit plan. They recognized some of the risk and left the meat of the benefit package as is."
Proposed remedies nationwide include replacing traditional defined-benefit plans with 401(k)-style defined contribution plans, or at least a hybrid of the two. Rhode Island, behind then-general treasurer and now Gov.-elect Gina Raimondo, passed a measure in 2011 that state officials estimate would save $400 million annually. Five public-sector unions are challenging the law in court after a compromise plan that the state says could have preserved 95% of the savings fizzled.
"I was delighted that Gina was elected governor," Richard Ravitch, the former New York lieutenant governor who helped advise New York City out of its mid-1970s financial crisis, said in an interview. "She's in it for the right reasons. She faced up to the fact that her state had to do something about the pension problem."
There is no shortage of calls for other solutions as well.
Ravitch, who is advising Detroit in its post-bankruptcy recovery, recommends changes to the Tower Amendment to enable the Securities and Exchange Commission to oversee securities. Such a move, he said, could help enhance transparency and spot financial troubles. Tower now prohibits the SEC and Municipal Securities Rulemaking Board from requiring issuers to directly or indirectly to file any information with them before selling bonds.
Duke's McCubbins suggested retirees might have to pay more so governments can claw back on benefits.
"People with grey hair or white hair or no hair, look forward to the day where your taxes are going to go up a lot in retirement rather than down," he said.
William Rhodes, the head of public finance at Philadelphia firm Ballard Spahr LLP, said Pennsylvania at least could consider a bondholder protection law akin to what Rhode Island passed in 2011 to set up a smooth bankruptcy filing by 19,000-population Central Falls.
That law protected bondholders in Central Falls' bankruptcy, which cut pension payouts severely.
"Pennsylvania is one of the states that's a candidate," said Rhodes, who also leads Ballard's municipal recovery initiative practice. "A state can be at risk going into a bankruptcy as an unsecured creditor."
Iliya Atanasov, senior fellow on finance for free-market think tank Pioneer Institute in Boston, urged states to project more realistic rates of return in a recent report.
According to PFM's Link, the funded ratios of many plans will begin to improve as long as investment returns stay positive.
"Many plans use asset smoothing, typically five years, to reduce the year-to-year impact of the market's ups and downs on funded ratios and contribution rates," he said. "As a result, the losses associated with the great recession and the credit crisis have been a negative impact on actuarial valuations in many cases until the fiscal year 2014 valuations."
Those losses have now been fully recognized, he said.
"By the same token, there has been enough disruption and disorder in the interim, from 2007 until today, that even with some rebound you'll continue to see state and local governments evaluate plans, and identify and mitigate some of their losses and produce some more budgetary certainty," Link said.
New guidelines from the federal Governmental Accounting Standards Board, according to Link, will enhance transparency.
"The single biggest thing GASB will do, and we've talked about it at PFM, is to make unfunded pension liability very, very visible to the investor community," he said. "Now it will be front and center."
Duke's McCubbins paints a gloomier picture. He envisions the kinds of liquidity crises New York experienced in 1975, when it scrambled for a three-day loan from banks and pension funds to make payroll.
"We're likely to see the day with volatility in the markets, with volatility in the financial system, that you're going to see this liquidity crisis," he said at the Penn Institute conference. That problem will be most pronounced in cities where pension liabilities greatly exceed assets and where the courts or a state law or constitution have roadblocked change.
"Lenders are going to look at this and say: 'Why are we going to loan you any money when we know you're going to go broke, and any money that you do take in in the future is going to have to go to pay pensioners, and not pay back future bondholders?'" said McCubbins.
"Insurers will refuse to insure those and then the cities are going to hit a liquidity problem."
