The decision to avoid the extra upfront expense was, in effect, a government decision to borrow each dollar at a 7.75% rate, says American Enterprise Institute resident scholar Andrew Biggs.
Fitch Ratings and Moody’s Investors Service have begun treating unfunded pension liabilities as debt for evaluating a state’s creditworthiness. Fitch has said it will factor in a 7% discount rate.
Because pensions are intended to be riskless and are difficult costs for states to shed, Biggs also believes the discount rate should be a risk-free Treasury rate.
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