Wednesday, May 14, 2014

Public Pension Disclosure

Public Pension Disclosure

There are a number of critics of public pension plans who think that every piece of information should be publicly available.  They argue that the taxpayers and pension beneficiaries have a right to know everything about how the money is invested.  Accepting this definition of transparency is like revealing all your cards when you play poker.  Public pensions already suffer because of the scale of their investments and the cumbersomeness of their policies and procedures.  Total transparency would cost public pension plans dearly, as every other investor would be able to pick them clean.


At present, the decision about what should be disclosed is very inconsistent across different states and even within states.  In some states, you can only learn the bare minimum about asset allocation and the names of the public plan’s managers.  In other states, there’s detailed information about allocations and fees.  The timing varies a great deal.  Some plans make quite detailed monthly and quarterly reports, while others only provide information in their annual reports.  The delays in the release of the annual reports can be lengthy.  For example, in North Carolina the annual report for the year ending June 30, 2013 only became available last month.  On the other hand, the minutes and exhibits for the Investment Advisory Committee are readily available.

Someone needs to promulgate more extensive and uniform disclosure requirements for public pension plan investments.  Perhaps the Governmental Accounting Standards Board (GASB) or the rating agencies could put some standards into place.  However, GASB has a poor record of moving on pension matters in a timely or consistent manner.

My suggestions were summarized awhile back in “What We Need to Know: Public Pensions,” February 7, 2014.  I also recommend Dan Primack’s analysis on private equity disclosure from his daily newsletter on May 6.[1]

Public Records Requests

When it comes to public records requests, the pension plans and not the money managers should be the decision-makers.  In most states, managers have assumed far too much power over disclosure by invoking the “trade secrets” exception to the public records laws.  As I’ve written on several occasions, managers abuse this exemption.  In my view, the “trade secret” exception should be very narrow, and the public fund’s lawyers rather than Wall Street’s lawyers should determine its applicability.  

There should be a second exemption based on the idea that disclosure would cause significant harm to the pension plan and its beneficiaries.   It goes back to that game of poker I mentioned at the beginning of this post.  If disclosure would be the equivalent of showing all the pension’s cards, then the document in question or a portion of its content should not be released.

Here are two examples of information that shouldn’t be disclosed.  Many pension plans manage assets internally.  At present, I don’t think there’s any legal exemption that would prevent brokers or the public from making public records requests for the pension’s trading blotter of pending traders. Try trading a stock or bond portfolio if the rest of the market knows what you are trying to buy and sell.

While my first example is hypothetical, the second one is a current concern.  Many public pension plan critics think that the underlying valuations of portfolio companies or real estate assets should be released.  This is a truly bad idea.   If pension plans released this information, it would hurt the plan when it comes to time for the money manager to sell the company or real estate asset.  These valuations are estimates provided by the managers.  Obviously, there’s uncertainty and conflict built into this arrangement. Public disclosure of the valuations won’t cure the conflict, but it will do damage. The best answer to testing private valuations is to ensure that public pensions are properly staffed.  

Disclosure isn’t a cure-all for eliminating conflicts of interest, biases, or undue influence when it comes to public pensions.  While we need to have better disclosure, if it is taken to an extreme, it will create more problems than it solves.   


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