As Dropout Nation readers know, Friday’s analysis of Philadelphia’s virtually-insolvent district’s fiscal condition also previewed this magazine’s evaluation of the financial state of Pennsylvania’s Public School Employees Retirement System. What has become clear from the latest analysis is that the Keystone State must take decisive action to address the defined-benefit pension’s woeful financial state — and that starts with demanding accurate accounting that reflects the dire reality.

Within the last week alone, state legislators have taken some steps toward addressing the woes of PSERS and Pennsylvania’s pension for state employees. This past Tuesday, the Keystone State’s House of Representatives held a hearing on a plan offered up by Rep. Warren Kampf, a pension reform hawk, to close participation in state pensions to new employees and require new hires to save money in defined-contribution plans. On the senate side, Majority Leader Jake Corman is putting together his own plan, which would follow along Kampf’s proposed move as well as essentially roll back Act 10, the state pension law passed in 2010 that boosted annuities collected by teachers to equal 75 percent of final year’s salary.

If Kampf and Corman can get their legislation passed any possible opposition within their own caucuses — a reason why former Gov. Tom Corbett’s pension reform plan was defeated last year — this would be one clear sign that legislators are finally taking the state’s pension crisis seriously.

Standing opposed to any reform plan is Gov. Tom Wolf, who successfully defeated Corbett for the state’s chief executive spot with the help of $732,400 in donations (along with other spending) by the American Federation of Teachers and its state affiliate there. Mindful of the debt he owes to AFT as well as to other public-sector unions, Wolf has made clear that he would not agree to any reductions in pension annuities. But given that Corman and his fellow Republicans control both houses of the state legislature and want to tie pension reform to the passage of next year’s state budget, Wolf may have to give something in order to get legislators to pass other aspects of his agenda.

But in order for Kampf, Corman, and Wolf to undertake any meaningful and substantive pension reform, it must have accurate data on the fiscal state of PSERS and the state employee retirement plan. Based on Dropout Nation‘s analysis of the teachers’ pension’s comprehensive annual financial report, the pension isn’t dealing honestly with its condition.

PSERS officially reports that its was underfunded to the tune of $33 billion in 2012-2013, a 10 percent increase over the previous year. But as you all know by now, those numbers aren’t real. As your editor detailed in last year’s analysis, one reason why lies with Act 120, the law passed by state legislators five years ago which senselessly hiked annuities when PSERS was already virtually-insolvent. Under the law, PSERS recognizes gains and losses over a 10-year period, instead of an already-ridiculous five years. This even more-aggressive-than-usual form of smoothing — which allows the pension to effectively hide investment gains and losses under the guise of keeping investment volatility from wreaking havoc on state and district budgets — gives gives the false impression that its financial condition is in good shape.

The bigger problem lies with the PSERS’ assumed investment rate of return of 7.5 percent. Given that the pension’s assets declined in value by 3.7 percent between 2008-2009 and 2012-2013, there’s no way it could even meet such an overly-optimistic rate of return. Using overly-inflated assumed rates of return are problematic because pensions can report insolvencies as being lower than they actually are. This can result in politicians abandoning any fiscal prudence, handing out annuity raises based on inaccurate data. What PSERS should do is base its rate of return on an average such as the Citibank Pension Liability Index (which is based on the yield for AA-rated corporate bonds) or at least assume a more-realistic return rate such as 5.5 percent.

To get to the heart of matters, Dropout Nation uses a version of a method developed by Moody’s Investors Service that uses a more-realistic 5.5 percent rate of return on investments. The result? PSERS is virtually insolvent to the tune of $41.3 billion for 2013-2014, or 27 percent higher than officially reported. Using last year’s analysis, the pension’s insolvency increased by 11.6 percent over 2011-2012. Based on a 17-year amortization rate, taxpayers would have to shell out an additional $2.4 billion in contributions just to get the pension back into solvency; that’s 82 percent more than the $2.9 billion in contributions made in 2013-2014.

Districts such as Philadelphia have already seen double-digit increases in contributions over the past few years. The impact of any effort on hiking contributions to finally address the insolvency would be tremendous.

For Philly, a $135 million hike in 2013-2014 would have led to a loss of $203 million, or more than the $165 million it lost in 2012-2013. For Pittsburgh Public Schools, which paid $28.3 million into PSERS in 2013-2014, a repayment of the pension’s shortfall would mean an additional $23 million in contributions; this would have meant that the portion of the district’s budget going to pensions would have increased from 5.3 percent to 9.7 percent, and more than doubling its $14 million operating deficit.

This isn’t just a problem for Keystone State districts. After all, Pennsylvania state government reimburses districts for as much as 56 percent of PSERS contributions. This means that the state (you know, taxpayers) would likely have to take on $1.4 billion of the bailout cost, based on Dropout Nation‘s estimates. This would be double than the $1 billion paid out by the state in 2013-2014; the percentage of that year’s state budget dedicated to PSERS would increase from 3.6 percent to 8.5 percent.

Meanwhile the problem is going to get worse thanks to the growing numbers of Baby Boomers heading into retirement. Some 16,404 retired teachers and other traditional district employees were added to the pension rolls in 2012-2103, a 12 percent increase over the previous year; the number of new retirees (before removals) increased by 54.6 percent between 2006-2007 and 2012-2013. With PSERS likely to add likely add 12,438 new annuitants (excluding deaths  and other removals) to the rolls ever year for the next decade, the pension’s will add at least $306 million a year in new annuity expenses over that time.

By the way: None of this includes PSERS’s unfunded retired teacher healthcare costs with which the state must also contend. The pension officially reports unfunded liabilities of $1.3 billion for 2012-2013. But unlike most pensions, PSERS uses the same inflated rate of return for the investments used to cover those costs as it uses for the pension. Using the same method applied to the pension, Dropout Nation determines that the true unfunded liability for the healthcare costs is $1.6 billion, or 27 percent more than officially reported. Based on a 17-year amortization rate, taxpayers would have to put down $95.7 million a year over 17 years to pay off that insolvency, 89 percent more than the $108 million contributed in 2012-2013.

Put simply, the Keystone State’s teachers’ pension is busted. Addressing that insolvency requires honest numbers about the true condition of its finances. Corman and Kampf should take steps toward that by passing legislation that ends the 10-year smoothing required by Act 120, as well as force the pension to reduce its assumed investment rate of return from 7.5 percent to a more-realistic 5.5 percent (or an average based on the annual change in Citibank’s pension index). Both moves would lead to accurate data on the PSERS true fiscal condition and force the state (along with districts) to deal honestly with it.

Along with those steps, legislators should pass legislation moving both existing and new employees out of defined-benefit pensions into hybrid approach that features defined-contribution accounts as well as cash-balanced accounts that guarantees an annual savings rate. The existing pension would then be cash-balanced, allowing workers already in the pension to move whatever they have already saved and whatever has been contributed by districts into the new accounts. Such a move would effectively stop PSERS’ insolvency from increasing. At the same time, it would also help younger teachers, who often lose out in most pension reforms, by providing them a portable plan that allows them to fully benefit from their hard work in classrooms.

One likely argument against such a plan from Gov. Wolf will be that such a transition would be too costly to the state. This is because the Government Accounting Standards Board recommends that states closing down pensions should aggressively reduce their insolvencies. But as Andrew Biggs of the American Enterprise Institute noted last week in the Wall Street Journal, Pennsylvania could reduce the insolvencies by a longer period than recommended by the accounting transparency organization.

While your editor recommends a 17-year amortization period (as Moody’s uses), the Keystone State could use as long as 20 or 30 years (the latter used by states such as California in far more-modest pension fixes). And if the existing pension is cash-balanced, with existing teachers moving what they are due to receive in a lump-sum payment into the new retirement package, the cost of the transition wouldn’t be all that prohibitive at all.

Ultimately, what matters most is that Pennsylvania officials finally force PSERS to honestly detail its virtual insolvency. Without accurate numbers, even the most-radical pension reform will fall apart.

Your editor didn’t expected much on the education policy front from new Maryland Gov. Larry Hogan, and so far, the former patronage handler for onetime predecessor Robert Ehrlich hasn’t disappointed. Save for a plan to reduce subsidies to districts such as Prince George’s County and Baltimore as part of his effort to address an $800 million budget shortfall for the upcoming fiscal year, the Old Line State governor has taken few steps to address the education crisis that has long been ignored by Democrats and Republicans alike through such guises as excluding kids in special ed ghettos from taking the National Assessment of Educational Progress.

But Hogan, along with legislators in Annapolis, will soon have to pay renewed attention to a financial challenge that cannot be ignored: The virtually-insolvent Teachers’ Combined System and its two defined-benefit pensions for instructors and school employees. The Republican will need to deal far more seriously with its underfunding than his immediate predecessor Martin O’Malley did during his tenure.

Even as Hogan gets into the job (including holding his first state of the state address this week), he finds himself reckoning with the legacy of O’Malley’s move three years ago to shift TCS’ future pension contribution costs outside those already borne by Maryland state government off its balance sheet onto that of counties, which are charged by the state with financial oversight of the state’s traditional districts. As with most modest pension reforms, O’Malley’s initiative did little to deal with the TCS’s growing unfunded liabilities from annuities (and cost-of-living increases) to retirees or clamp down on benefits to Baby Boomers and other teachers hired before the changes. The plan also didn’t lead to the state and counties to pay their fully-required contributions; they paid $359 million less into TCS in 2013-2014 than officially required.

The state legislature’s fiscal analysis agency determined that counties and districts will have to pay $56 million more in 2016 (when they bear the full costs) than originally anticipated. This comes just as some counties, notably Prince George’s (which is home to Dropout Nation) plan to increase sales taxes just to deal with TCS’ pension liabilities as well as the other long-term burdens from decades of dealmaking between districts, the state, and affiliates of the National Education Association and American Federation of Teachers.

Given these increased costs, and the complaints that will likely come from homeowners as counties such as Prince George’s begin hiking up property taxes, there will be strong resistance to any effort by Hogan to reduce school funding. Hogan’s plan to reduce the Old Line State’s overall tax burden, one of the nation’s highest, will likely fall apart in the face of worries over the increased costs.

But based on Dropout Nation‘s analysis of the pension’s financial numbers, the woes with which Hogan, legislators, and counties must wrangle are even worse than they realize.

As officially reported by the Maryland State Retirement and Pension System, which manages TCS, the pension is virtually-insolvent to the tune of $10.8 billion. But as this publication always reminds you, actuarial tricks such as smoothing (which allow for losses and gains to be recognized over five-year periods instead of immediately on a market-value as required in the private sector) essentially conceal the true value of pension assets, which meas that insolvencies may actually be greater than initially reported.

For TCS, the real problem lies with overly-inflated rates of returns on investments. This allows pensions to report insolvencies as being lower than they actually. How? During good times, when the stock and bond markets are performing stellar, pensions can claim that investments can cover shortfalls. This leads politicians to abandon all fiscal prudence by increasing annuity payments and reducing contributions paid by states, districts, and teachers in the hopes that Wall Street will cover the shortchanging. During periods such as the economic malaise that has engulfed the nation since 2007, pensions can simply continue assuming that the markets will cover those insolvencies some day; because rates of return are key in determining shortfalls, a high rate of return gooses up the value of assets even if isn’t reality.

The best approach is to assume a conservative rate of return, based either on yields for AA-rated corporate bonds (such as Citibank Pension Liability Index used by Moody’s Investors Service for its analysis of defined-benefit pension liabilities, or Barclays Capital Long U.S. Corporate Index), or a base rate of 5.5 percent as utilized by Dropout Nation based on an earlier version of Moody’s pension analysis model. In the case of TRS (as well as Maryland’s pensions for other civil servants), the official rate of return is 7.65 percent is at least 2.1 percentage points higher than it should be.

So to get to the full level of underfunding, Dropout Nation uses a version of the Moody’s model, using the 5.5 percent rate of return; for every percentage point decrease in rate of return, shortfalls increase by 13.3 percent. Based on the analysis, TCS’ is actually insolvent to the tune of $13.8 billion, or 28 percent higher than officially reported. Based on a 17-year amortization schedule, taxpayers would have to pay out an additional $813 million a year just to cover the shortfall; that is 81 percent more than the $1 billion contributed in 2013-2014 (which was $359 million less than was supposed to be paid).

For Hogan, addressing the shortfall in any sensible way becomes difficult because of O’Malley’s pension revamp. The governor could shift those full costs onto counties and districts. But massive property tax hikes won’t go over so well with homeowners, who will be reminded by superintendents and county executives that the fault lies with Annapolis, and thus, Hogan and his legislative colleagues. The state itself also doesn’t have a lot of wiggle room. The round of tax hikes under O’Malley’s tenure is one reason why Hogan won the top job over Lt. Gov. Anthony Brown last year.

There’s also the pressure from the Old Line State’s other virtually-busted pensions, which MSRPS officially reports as being $8.8 billion, but is more-likely $11.3 billion based on Dropout Nation‘s estimates. Taxpayers would have to pay an additional $662 million a year over 17 years (or nearly double the $734 million paid in 2013-2014) just to address those shortfalls properly. Pension costs account for 3.9 percent of state budget costs in 2013-2014, according to this publication’s analysis.

Meanwhile the problem will continue to get worse. This is because the number of retirees continues to grow. The number of TCS retirees increased by 43 percent between 2004-2005 and 2013-2014. With an average of 3,024 new retirees coming on board every year (all under the larger Teachers’ Pension System) at a cost of $61.8 million, TCS’ insolvency will continue to grow.

The state has failed to address TCS’ insolvency properly — and not just by shortchanging it by not paying the full tab. Because teachers only pay 31 cents out of every dollar put into the pension (versus contributing every dollar under a defined-contribution plan with an employer match up to six percent), they aren’t paying enough toward their own retirements.

But the problem isn’t just for taxpayers. Since three out of every 10 newly-hired teachers will leave classrooms within five years — and even higher rates of attrition are likely among high-quality instructors — defined-benefit pensions such as TCS are of no use to them. Because it takes 10 years to fully vest into a TCS pension — and the retirement funds aren’t portable as defined-contribution plans are — many teachers are unlikely to fully benefit from the few dollars they actually pay in. These problems, along with TCS’ underfunding, is why the National Council on Teacher Quality rated Maryland D-plus, or among the worst states for teacher retirement in a study it released last month. All in all, TCS is a bum deal for teachers, taxpayers, and children alike.

Hogan needs to take serious long-term steps on the pension front. This starts with fully paying down TCS’ insolvency (along with that of Maryland’s other pensions). The state will have to bear some of the additional costs; so will existing teachers, who must pay additional contributions into the pension just to address the shortfall. Since the state has no explicit laws on the books granting vesting rights to teachers and other public employees, the state should also move to shut down TCS other than to pay out benefits owed to retirees and current teachers who have already paid into it. The state must also put an end to cost-of-living increases for retirees, which add to the liabilities.

At the same time, Hogan must provide a better retirement deal for teachers, especially high-quality instructors who deserve better. This includes moving new teachers and current instructors into a hybrid system that features a contribution plan to which teachers can contribute as much toward their retirement as they so choose (with a five percent match from districts) along with a smooth accrual defined-benefit element similar to an approach advocated by Josh McGee of the John and Laura Arnold Foundation and Marcus Winters of the Manhattan Institute in a report released last year.

For Hogan, the state’s teachers’ pension woes provide a rude awakening to the realities of governing. He will need to use this early period to rally support for addressing a pension crisis that will complicate the state’s long-term prospects.

These days, Bobby Jindal is grasping at every straw he can to help his all-but-dead campaign for the Republican presidential nomination gain traction. From demanding today at a Heritage Foundation event that House and Senate Republicans ditch the Affordable Care Act and implement an alternate healthcare plan, to floating a quixotic plan to end the nation’s dependence on oil on Monday, to his continuing desperate effort to halt execution of Common Core reading and math standards he once strongly supported, the once-respectable Louisiana governor is doing all he can to win over movement conservatives and moderate Republicans needed to gain the nod.

Yet you won’t find Jindal talking much about addressing the long-term defined-benefit pension and unfunded retired civil servant healthcare costs that are now burdening the balance sheets of every state government. For good reason. Jindal has done almost nothing to address the Bayou State’s massive pension deficits. Two years ago, the Pew Center on the States reported that the Bayou State’s collection of pensions were only 56 percent funded. Because of the state’s fiscal fecklessness — along with the high costs of the deals it made with local governments and public-sector unions — the state was faced with paying down $51 billion in unfunded pension liabilities, along with another $10 billion in unfunded retired civil servant healthcare costs (for which Jindal and his predecessors have put away no money to cover). Moody’s Investors Service determined last year that the state’s pension shortfalls, when accurately determined, were 30 percent greater than revenue. Even with such high-profile spankings, Jindal, along with his colleagues in state government, have still done nothing to address the problem.

To see how badly Jindal has handled the Bayou State’s long-term fiscal woes, just look at the latest comprehensive annual financial report for the Teachers Retirement System of Louisiana, the defined-benefit pension for teachers and other school employees.

The pension officially reports an underfunding of $$11,.3 billion for 2012-2013. Based on the official numbers, the insolvency is 72 percent higher than the $6.6 billion it reported in 2007-2008, the year Jindal took office. Just on these numbers alone, it is clear that Jindal, along with his colleagues in the state legislature and the Board of Elementary and Secondary Education, have done little to reverse the pension’s tenuous status as a going concern.

But as with most state pensions, TRSL is understating the level of its insolvency. For one, thanks to the pension’s smoothing efforts (which allow it to recognize gains and losses over a five year period), only a fifth of its losses were recognized and counted against liabilities. More importantly, TRSL assumes an overly inflated rate of investment growth of eight percent. This in spite of its own admission that it has only achieved a five-year return rate of just 4.8 percent on its investments, which, by the way, is lower than the 5.2 percent five-year return rate Wilshire Associates says has been experienced by the financial markets. The pension admits that its assets (on an actuarial basis) decreased by 5.4 percent between 2008 and 2013, even as its benefit payouts increased by 30 percent (from $1.4 billion to $1.8 billion) in that time.

To get to the true level of TRSL’s insolvency, Dropout Nation uses a version of a technique developed by Moody’s Investors Service, which assumes a more-realistic 5.5 percent rate of a return. [Moody’s bases its rate of return on the performance of a bond index, which can range between four and six percent.] Based on those numbers, TRSL’s true insolvency is likely $15.4 billion, or 36 percent higher than officially reported. If Louisiana state government was forced to make up the shortfall over 17 years, taxpayers would have to contribute an additional $905 million a year, or 92 percent more than the $984 million paid into the pension last year. This, in turn, would have meant that the state would have had to carve out an additional three percent of its $29.7 billion budget just to shore up the pension.

For Louisiana, addressing TRSL’s insolvency is especially critical because more Baby Boomers in the teaching ranks are heading into retirement. Each year, 1,602 Bayou State teachers covered by TRSL have retired every year between 2004 and 2013, according to a Dropout Nation analysis. Each retiree, on average, collects an annual annuity of $24,358. [Four-point-eight percent of them, or 2,899 retired teachers and school leaders, are collecting annual annuities of $54,000 a year or more.] So TRSL can easily expect to pay out at least an additional $39 million a year — and even that is an understatement: The pension paid out $92 million in new annuities last year thanks to the retirement of 3,095 teachers and other school workers.

Certainly Jindal, who only holds one seat on TRSL’s 17-member board through the state department of administration, can’t take all the responsibility for its woeful condition. After all, the Bayou State legislature holds two seats on the pension’s board (as well as exercise ultimate control over its finances through appropriations and budgeting), while State Treasurer John Kennedy also sits on the board. They, along with Supt. John White, who sits on the board (as well as predecessors including former state education boss Paul Pastorek), must join the governor in taking responsibility for its virtual insolvency.

Yet Jindal can’t be let off the hook. As seen in his effort to halt Common Core implementation, as well as with his more-laudable efforts to expand the Bayou State’s school voucher program, Jindal has been more than willing to aggressively take on issues, especially if it also helps his ambitions of higher elected office. The fact that Jindal has done little more than sign into law House Bill 61, which would have put new state’s higher ed employees into a cash-balance pension plan before it was struck down by the state supreme court, shows how little Jindal cares about addressing the very fiscal issues that, along with education, can make the difference between Louisiana emerging as a leading state and it continuing its woeful position as the worst in everything that matters.

Jindal still has a little time left in office to take on pension reform in a meaningful way. One solution must start with increasing the contributions paid by current workers into the pension. Teachers contribute just 25 cents out of every dollar contributed into TRSL in 2013; this is eight cents lower than the contribution level in 2008. Increasing teacher contributions to at least 37 cents of every dollar put into the pension — the level of contribution made by teachers a decade ago — would at least be a good start.

But it won’t be enough because increasing contribution levels alone doesn’t reduce the growth in unfunded liabilities that comes with additional retirements. This will only come if Louisiana takes an even bigger step: Moving existing and new teachers out of TRSL and putting them into a hybrid plan that features a defined-contribution element into which they can save as much as they choose for retirement. Certainly Jindal will have to work hard to rally the two-thirds support in the legislature needed for passing such a plan. But he could work with his likely successor as governor, U.S. Sen. David Vitter, to make it a reality.

For Louisiana, school districts, and ultimately, taxpayers and children, this move would immediately slow the growth in TRSL’s liabilities. It is also beneficial for younger teachers. Given that half of them are likely to leave the profession within their first five years, moving to a portable hybrid retirement plan would actually allow them to reap the full rewards of their work.

The Bayou State faces a pension crisis nearly as daunting as its educational woes. But if Jindal is serious about leaving office with some kind of a legacy worth having, especially in light of how his counterproductive battle to halt Common Core implementation has ruined him politically, he should tackle it with vigor.