Tuesday, September 20, 2016

Just a reminder

Take it away, Walter Russell Mead:
America’s public pension funds, which manage trillions of dollars in retirement assets for millions of civil servants, are systematically deceiving taxpayers, the politicians, and municipal bond investors with elaborate accounting sleight-of-hand. The “official” numbers show that public pension funds are struggling; the accurate ones show that the looming fiscal time bomb is so explosive that it may be impossible to defuse.
Mead points us to this piece from the New York Times, which has plenty to keep you awake:
When one of the tiniest pension funds imaginable — for Citrus Pest Control District No. 2, serving just six people in California — decided last year to convert itself to a 401(k) plan, it seemed like a no-brainer.

After all, the little fund held far more money than it needed, according to its official numbers from California’s renowned public pension system, Calpers.

Except it really didn’t.

In fact, it was significantly underfunded. Suddenly Calpers began demanding a payment of more than half a million dollars.

“My board was somewhat shocked,” said Larry Houser, the general manager of the pest control district, whose workers tame the bugs and blights that threaten their corner of California citrus country. It is just a few miles down the road from Joshua Tree National Park.
So why would Calpers want half a million dollars?
It turns out that Calpers, which managed the little pension plan, keeps two sets of books: the officially stated numbers, and another set that reflects the “market value” of the pensions that people have earned. The second number is not publicly disclosed. And it typically paints a much more troubling picture, according to people who follow the money.
So what's going on? Back to the Times:
The two competing ways of valuing a pension fund are often called the actuarial approach (which is geared toward helping employers plan stable annual budgets, as opposed to measuring assets and liabilities), and the market approach, which reflects more hard-nosed math.

The market value of a pension reflects the full cost today of providing a steady, guaranteed income for life — and it’s large. Alarmingly large, in fact. This is one reason most states and cities don’t let the market numbers see the light of day.
If you keep two sets of books in the private sector, it's usually called fraud. More, a lot more, at the link, including a few unpleasant surprises for the municipal bond market.


Bike Bubba said...

It strikes me that if mainstream government or private sector actuarial practice does not take assets and liabilities into account, that is quite frankly speaking malpractice. One case of this sort of thing that any good finance guy (like Roosh) would warn about that impacted where I grew up was that some of the steel companies funded their pensions with corporate bonds--so that when the company went under, so did the pension.

(my retired steelworker friends thank you the taxpayer for funding what remains of their pension, by the way)

It was also striking that, despite the utter inability of the finance/actuarial guys to deliver a solid pension, everybody in the company, including retirees, knew the month they would declare bankruptcy. They simply had to watch the asset and liability curves, and when they crossed, they'd file.

Sometimes it seems that we're too clever by half in how we do these things, and it's scary that people are telling us to "trust the experts" even more. No, thank you--been there, done that.

Gino said...

those in charge ARE too clever by half. they never paid a price, did they?

Bike Bubba said...

Well, the surviving retired executives, finance guys, and actuaries also lost their pensions, I believe. So yes, they did pay a price. There may be the perception that a smart guy can get around it, but there is a price to pay.

We might also add that, at least inasmuch as the private sector, investing mostly in company stock and bonds is idiotic but legal. However, two different sets of books is flatly illegal. We need to hold both the private and public sector to the same set of rules.

Or, better yet, migrate government workers from defined benefit to defined contribution programs. To do anything else is simply to presume on the future, which is why Bethlehem Steel employees got shafted in my town.