Ask a Scholar: State Discount Rates

King Banaian

Dear Ask a Scholar, 

Why are states allowed to use an 8% discount rate as compared to the private sector that uses a 5% discount rate? This premise is bankrupting cities and states. What is documentation and proof of this idea, when Warren Buffet states the 100 yr. average is 5.33%?

- Fred Starkey

Answered by King Banaian, professor and chairman of the Economics Department of St. Cloud State University. He holds a Ph.D. in economics from the Claremont Graduate School.  He has consulted at the central banks of Ukraine, Egypt and Macedonia and the ministries of finance of Indonesia, Macedonia and Armenia.  He is author of The Ukrainian Economy Since Independence (Edward Elgar, 1998), co-editor of The Design and Use of Political Economy Indicators (Palgrave, 2008) and more than thirty-five articles and book chapters discussing monetary policy and political economy. He directs the Center for Economic Education at SCSU. He was recently elected to the Minnesota House of Representatives. 

This question is very interesting to us in state legislatures right now. There is no standard that applies -- each state can choose its own discount rate. Most states are currently between 7-8.5%. The problem is that if you assume a lower rate, your state will be seen as having a larger unfunded liability, which may trigger either increased contributions by state workers, tax increases or (even more controversial) reductions in benefits to retirees. Most legislatures are thus reluctant to change the assumption. I would note to Fred that these pension plans invest in a wide spectrum of assets from bonds to stocks to private investment vehicles. So they do not necessarily earn just 5%, but they have had trouble making that over the last ten years cumulatively.

* * *

About “Ask a Scholar”

Have a question Wikipedia can’t answer? We’ll match your question to a scholar with an answer. 

Questions submitted to “Ask a Scholar” should call for educated judgment rather than facts that can be found easily with an internet search. We especially welcome questions that provide professors the occasion to draw erudite distinctions and incorporate mention of matters you had no idea were connected to the topic at hand. Simply email NAS or submit questions via Intellectual Takeout's Ask the Professor feature. We'll field your question to a scholar and get back to you with the answer as soon as possible. 

  • Share

Most Commented

September 6, 2024

1.

Professor Alleges "Widespread" Discriminatory Hiring Coverup at University of Washington

Audio acquired by the National Association of Scholars describes allegations of coverup race-based hiring coverup at the University of Washington...

October 29, 2024

2.

The Looming Irrelevance of Middle East Study Centers

Today’s Middle Eastern Studies Centers are facing a crisis due to the winds of change in the Middle East and their own ideological echo chamber....

September 25, 2024

3.

NAS Statement on University of Pennsylvania Sanction of Amy Wax

The National Association of Scholars is outraged—but not surprised—by Penn's decision to penalize Wax for exercising her academic freedom. ...

Most Read

May 15, 2015

1.

Where Did We Get the Idea That Only White People Can Be Racist?

A look at the double standard that has arisen regarding racism, illustrated recently by the reaction to a black professor's biased comments on Twitter....

October 12, 2010

2.

Ask a Scholar: What is the True Definition of Latino?

What does it mean to be Latino? Are only Latin American people Latino, or does the term apply to anyone whose language derived from Latin?...

September 21, 2010

3.

Ask a Scholar: What Does YHWH Elohim Mean?

A reader asks, "If Elohim refers to multiple 'gods,' then Yhwh Elohim really means Lord of Gods...the one of many, right?" A Hebrew expert answers....