Unfunded pension liabilities of cities and states have doubled as their returns have fallen over the past decade and are now approaching $1 trillion. The problem has escalated a national debate about whether these public entities can continue to pay the pensions of police officers, firefighters, teachers and other public employees.

The 20-year annualized returns for public pensions will decline to their lowest ever annual rate — about 7.5 percent, according to the Wilshire Trust Universe Comparison Service. In comparison, when Wilshire began tracking this statistic in 2001, the median return was 12.3 percent.

To be able to continue paying for the retirement plans, governments will need to take a combination of steps, including:

¦ Jettisoning their existing pension plans for lower-cost options.

¦ Raising taxes and requiring greater contributions from their employees.

“Many states and local governments may be facing difficult choices if investment returns remain low,” said Keith Brainard, research director at the National Association of State Retirement Administration.

Connecticut now allocates 10 percent of its budget to reduce the size of its unfunded pension liabilities. Kentucky has less than half of the money it needs to fund future obligations for about 345,000 public employees and retirees. In Pennsylvania, state leaders are considering replacing their pensions with cheaper 401(k)-style plans.

Marcie Frost, who in October will become head of one of the largest public pension funds, the California Public Employees’ Retirement System, known as Calpers, highlighted the problem. Calpers’ pension gap is currently $112 billion. In a call with reporters July 14, Frost said that while she is an advocate for traditional pension benefits, she is not certain they are the right plan for California. Calpers recently announced that its fiscal 2016 return was .6 percent — the tiniest gain since the 2008-2009 financial crisis.

Why have returns dropped?

First of all, America has suffered from either economic recessions or slow economic growth for the past 15 years. Secondly, we have sustained a prolonged period of very low interest rates since 2008.

Pension funds invest heavily in fixed-income securities. In 1995, a fund investing solely in investment-grade bonds could earn 7.5 percent. The decline of the 10-year Treasury from its historical levels to about 1.5 percent hinders the ability of investment managers to achieve higher returns.

To put the problem in perspective, every one-percentage-point drop in investment returns represents an increase of 12 percent in liabilities, according to the Center for Retirement Research at Boston College. Stated differently, if your investment return declines by 1 percent, then to fund your pension obligations taxpayers or workers much chip in 12 percent more to defray these liabilities.

The outlook for continued low interest rates means that the 20-year annualized returns will go even below the recently reported 7.47 percent. That is, 7.47 percent was earned during the early years on the 21st century when we enjoyed greater economic growth, higher stock market returns and higher interest rates. Assuming a pension fund invests 50 percent of its portfolio in fixed-income assets earning 2 percent, then it must earn close to 13 percent from its equity investments and other alternatives to achieve a 7.5 percent return.

Consistent returns from equities and alternative investments of 13 percent are unreasonable to expect.

The low pension returns garnered by state and local governments undermine their ability to both pay their current pension obligations and maintain their employment levels.

Historically, civil servants accepted lower current wages because they anticipated lifetime employment and a livable pension. The low returns of their pension funds undermine this tradeoff. The prospect of major layoffs or lower compensation to our civil servants is disconcerting, given our need for high-quality education, upgraded law enforcement and high-quality on-going civil service administration of laws and regulations.

Originally published in the Sarasota Herald-Tribune