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FOR A REAL BUDGET BUSTER...

If President Clinton gets his way, Congress will soon pass an economic package designed to slash the federal budget deficit nearly in half, to about $180 billion, by 1997. But the projection ignores one of Washington's dirtiest secrets: If the government had to abide by corporate accounting standards for the lavish pension plans of federal workers, the sea of red ink would be one-third higher.

Companies are supposed to put money aside in reserves to provide for employees' future pension benefits. But the federal government, which operates on a pay-as-you-go basis, hasn't been accounting for retirement benefits as they are accrued by many of its workers. So as an aging federal work force edges toward retirement, two of the largest "trust funds" set up to cover 7 million civil-service and military employees are now underfunded by more than $1 trillion (chart). As a result, taxpayers are in for a future shock: By the year 2010, the funds needed to cover annual benefit payments are expected to nearly triple from current levels, to $160 billion.

The implications for taxpayers are ominous: huge tax increases or savage budget cuts down the road. "The pension liability is growing faster than funds are being set aside. This is money that will not be available for other uses in the future," says Dallas L. Salisbury, president of the Employee Benefit Research Institute, a public policy group.

For Washington, the irony is particularly acute. Policymakers have been hammering companies for years to shore up their pension plans. But the $51 billion in Corporate America's unfunded liabilities is dwarfed by the federal government's own funding gap.

Washington isn't the only source of such troubles. As states and cities grapple with their own fiscal woes, more and more of them have failed to build adequate reserves for future pension commitments. The plans of 28 states are underfunded by a total of $55 billion, according to consultants Wilshire Associates Inc. (table). The firm also calculates that more than a dozen states have less than 75% of the assets they will require to meet projected pension needs. "Some states are definitely in poor financial condition," says Jeanne M. Shearer, an associate with Wilshire.

PARITY PLUS. Experts believe that states with troubled pension plans will be forced to slash retiree benefits--so they may not get their full pensions--raise taxes, or use accounting gimmicks that only delay the day of reckoning. In 1989, the Illinois legislature agreed to pump an average of $500 million a year for seven years into five plans with unfunded liabilities then totaling $8.2 billion. But the legislators quickly fell behind in fulfilling this pledge. And though Republican Governor Jim Edgar tried to make up $55 million of an accumulated $295 million shortfall in contributions, in June 1992 he raided $21 million of that pot to balance the state's operating budget.

West Virginia took a daring path that other states may have to follow. In four years, Democratic Governor Gaston Caperton has pushed through $500 million in tax hikes, a third of which will be used this year to rebuild the state's troubled teachers' pension plan. As recently as 1987, West Virginia had contributed only $16 million toward worker retirement. "This governor has made a concerted effort to fund the system," says James L. Sims, the fund's executive secretary. "Maybe this is one time West Virginia is ahead of the game."

The federal government seems unlikely to follow West Virginia's lead anytime soon. In 1986, federal agencies were required to begin creating reserves for pension benefits accrued by workers hired after that date. But the money in such special accounts, like cash held in the Social Security trust fund, is merely an accounting convention--the funds can be used for other purposes. Essentially, the feds--and the states--simply cover their current pension obligations with tax receipts.

But as pension outlays grow, the feds may be forced to take stronger action. And given public support for paring the deficit, when the big payments come due, tax increases or program cutbacks are likely. The first target may well be the pension plans themselves, which are often more generous than those provided in the private sector. Federal workers, for instance, are guaranteed annual cost-of-living adjustments (COLAs). Many private-sector workers aren't promised COLAs, though some employers do make periodic inflation adjustments.Washington is cautiously starting to trim some of the pension fat. To meet Clinton's deficit-reduction targets, Congress agreed to delay the next cost-of-living increase for federal civil-service retirees by three months--a seemingly innocuous move that will trim benefits by $9 billion over the next five years. Federal workers, predictably, aren't happy. "It's unfair for Congress to continue to tinker with the retirement system. Employees ought to know what they're going to get from investing in a career in federal government," says Robert M. Tobias, president of the National Treasury Employees Union.

Lawmakers themselves may have mixed feelings about reforms that could both reduce benefits and raise questions about generous congressional pensions. They provide average lifetime payments of $2 million to each retired U.S. Senator and $1.5 million to former members of Congress. When it comes to paying the tab for lavish government pensions, the bag-holders will likely be the next generation of taxpayers. WHERE STATE PENSION

HEADACHES LOOM

Percent Shortfall

funded* Billions

WEST VIRGINIA 33% $ 2.1

MAINE 48 1.7

MASSACHUSETTS 55 6.3

LOUISIANA 59 5.2

OKLAHOMA 60 2.6

INDIANA 65 2.3

CONNECTICUT 69 3.7

ILLINOIS 71 5.6

MICHIGAN 75 7.1

*Assets as a percentage of liabilities, for projected benefit obligations

DATA: WILSHIRE ASSOCIATES INC.

Dean Foust in Washington, with David Greising in Chicago


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