Saturday, July 25, 2009
Public Pension Problems
"Here's a dilemma: You manage a public employee pension plan and your actuary tells you it is significantly underfunded. You don't want to raise contributions. Cutting benefits is out of the question. To be honest, you'd really rather not even admit there's a problem, lest taxpayers get upset. What to do? For the adminstrators of two Montana pension plans the answer is obvious: Get a new actuary. Or at least that's the essence of the manager's recent solicitations for actuarial services which warn that actuaries who favor reporting thew full market value of pension liabilities probably shouldn't bother applying. ... Based on their preferred accounting methods--which discount future liabilites based on high but uncertain returns projected for investments--these plans are underfunded by around $310 billion. ... Using [lower interest rates], 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. ... Some public pension adminstrators have a strategy though: Keep taxpayers unsuspecting. ... Pubic pension administrators argue that government plans fundamentally differ from private sector pensions, since the government cannot go out of business. ... The Government Accounting Standards Board, which sets guidelines for public pension reporting, does not currently call for reporting the market value of public pension liabilities", my emphasis, Andrew Biggs at the WSJ, 6 July 2009, link: http://online.wsj.com/article/SB124683573382697889.html.
If General Motors can go bankrupt, California, Michigan, New York, New Jersey or any other state can. Got muni bonds? Sell immediately.