Monday, September 19, 2016

An Unwarranted Attack on Public Pensions By the New York Times

An Unwarranted Attack on Public Pensions By the New York Times

Here’s a sensational headline that might have caught your attention if the Presidential election, terrorism, or the Emmy awards weren’t dominating the news cycle: “A Sour Surprise for Public Pensions: Two Sets of Books.”  The headline appeared on the front page of the business section of Sunday’s New York Times and is featured on the DealB%k website.[1]  The headline is misleading and the article is poorly researched and reported.  I’m detouring again from my artistic endeavors because it’s this kind of bad reporting that will become fuel for ideologues who want to eliminate public pension plans. 



I know that pension issues aren’t as exciting as Donald Trump’s pronouncements on President Obama’s place of birth.  I also know that Hillary Clinton’s use of the word “deplorables” deserves virtually endless commentary, while issues of pension accounting are supposed to be confined to academic journals and esoteric conferences.  At first glance I was thrilled that Mary Walsh Williams, the Times reporter, was given the opportunity to write extensively about one of the challenges facing public pensions.  However from the headline onward, it was clear that Ms. Williams had completely mischaracterized one of the central issues of public pension plans: the calculation of liabilities (what is owed to retirees and current employees).

Rather than layout every last shortcoming in Ms. Williams article, I direct you to Yves Smith at Naked Capitalism (http://www.nakedcapitalism.com/2016/09/new-york-times-owes-calpers-a-retraction-for-hatchet-job-on-pension-fund-termination.html) who does a thorough and colorful job of shredding the claims in the article.

Ms. Williams builds her thesis that pension liabilities are grossly underreported and unmanageable on the basis of a six person pension that withdrew from CalPERS in order to manage its own 401(K) program.  CalPERS has 1.8 million members across hundred of units of government, and Ms. Williams plucked one unit (a pest control district) to illustrate the allegedly intractable problems of funding public pension plans.

Leaving all the particulars to Naked Capitalism, I’ll emphasize two key points.

1.     CalPERS and as a general matter public pensions do not operate two sets of books.  The article’s headline would have you believe that Bernie Madoff is running America’s public pensions.  There is only one set of books.  When the tiny pest control unit decided to withdraw from CalPERS it faced a formula (not another set of books) that extracts an appropriately high price for any unit of government that opts to withdraw.  Moreover, there shouldn’t have been any surprise as the formula and pest control units exit cost were publicly available.

2.     Public pension plans under report their liabilities, but not nearly to the extent suggested by the Times article.  I’ve written about this problem many times.  In a nutshell, public pensions estimate the liability by applying the expected investment return (6.5% to 8%) as a discount rate.  This method is enshrined in accounting standards that have long been in need of reform.  Clearly, the discount rate should reflect the true risk of the liability, which is something less than a basket of stocks, bonds, real estate and private equity.  However in Ms. Williams’s reporting, we are led to believe that the discount rate should be a completely riskless US Treasury.  The proper discount rate lies in between these extremes and doesn’t create the national pension crisis suggested in the article.

In all too many instances some legislatures and municipalities have failed to properly fund their pension obligations.  That’s a problem worth writing about.  Most public pension plans have succumbed to lure of hedge funds and private equity as a magic potion for painlessly boosting returns.  That’s also a story worth writing about.  And pension liabilities aren’t properly calculated, which is worth writing about in a manner that doesn’t resort to sensational headlines and faulty analysis.



[1] http://www.nytimes.com/2016/09/18/business/dealbook/a-sour-surprise-for-public-pensions-two-sets-of-books.html?ref=business&_r=0