How The Public Pension Funds Avoid The Truth

Courtesy of Tom Lindmark of BUT THEN WHAT

There’s been much discussion, in fact so much as to cause overload, about the pension time bomb among state and local governments that I hate to add to it. Nevertheless, I would like to direct you to a short and easy to read editorial in the WSJ today.

The point of the article is that the states continue to cook the books when it comes to pension accounting and a fair representation of the liability to which their taxpayers are subject. It illustrates just how far some states are going to pull the wool over everyone’s eyes:

Public employee pension plans are plagued by overgenerous benefits, chronic underfunding, and now trillion dollar stock-market losses. Based on their preferred accounting methods — which discount future liabilities based on high but uncertain returns projected for investments — these plans are underfunded nationally by around $310 billion.

The numbers are worse using market valuation methods (the methods private-sector plans must use), which discount benefit liabilities at lower interest rates to reflect the chance that the expected returns won’t be realized. Using that method, University of Chicago economists Robert Novy-Marx and Joshua Rauh calculate that, even prior to the market collapse, public pensions were actually short by nearly $2 trillion. That’s nearly $87,000 per plan participant. With employee benefits guaranteed by law and sometimes even by state constitutions, it’s likely these gargantuan shortfalls will have to be borne by unsuspecting taxpayers.

Some public pension administrators have a strategy, though: Keep taxpayers unsuspecting. The Montana Public Employees’ Retirement Board and the Montana Teachers’ Retirement System declare in a recent solicitation for actuarial services that “If the Primary Actuary or the Actuarial Firm supports [market valuation] for public pension plans, their proposal may be disqualified from further consideration.”

Scott Miller, legal counsel of the Montana Public Employees Board, was more straightforward: “The point is we aren’t interested in bringing in an actuary to pressure the board to adopt market value of liabilities theory.”

At least they aren’t shy about what they’re up to. I guess the rationalization is that so long as no one knows about a problem there isn’t a problem. What the hell, it worked for California for a long time.

Now it’s not like the government and private accounting standards associations aren’t aware of the problem. They are “studying it” and have been doing so for years. Currently they think that they may have a position on the subject sometime after 2013. Of course, if nothing implodes by then they will no doubt subject the topic to more scrutiny in order to allow the problem compound.