Fox & Hounds: Another Smokescreen from CalSTRS’s CEO

There’s a memorable scene in the movie Airport in which Dean Martin, playing an aircraft captain, is asked by a passenger why it looks from the stars that the plane has turned around.   Not wanting the passengers to learn the truth (the plane had indeed changed direction), Martin responds with complex obfuscation designed to confuse the questioner.  Mystified, the questioner is silenced, exactly as Martin wants.

If his recent blog post about why CalSTRS needs a cash infusion is any indication, it looks like CalSTRS CEO Jack Ehnes has adopted Martin’s strategy.

Last month, Ehnes wrote that the funding shortfall for which CalSTRS is seeking a 30-year, $240 billion cash infusion from California taxpayers “stems largely” from the 2008-9 economic downturn.  In response, I wrote that the facts appeared to conflict with that assertion.  Subsequently, Ehnes wrote a blog post that meanders down a puzzling path and ends with this:

“Returns less than the assumption are what caused an increase in the unfunded liabilities that exceeded $48 billion. This is why CalSTRS says the unfunded liability “stems largely” from the 2008-09 market decline.”

I asked several lay people if they understood what Mr. Ehnes wrote. All had student, car, credit card or home loans, all had savings or other investment accounts, and all understood that Ehnes seemed to be saying that CalSTRS’s liabilities grew because CalSTRS ‘s investment returns weren’t as high as it hoped.  But none understood how that could be. In their experience, obligations don’t increase in size whenever they earn less than hoped.  As one put it, “I owe what I owe regardless of what I earn.”

So I asked an actuary, who cleared up the mystery. Ehnes had skipped a step by neglecting to mention that, under US public pension accounting, the phrase “returns less than the assumption” also means “returns less than the rate at which public pension liabilities accrete (grow).”  This is because, uniquely under US public pension fund accounting, liabilities grow at the same high rate public pension funds assume they will earn on assets. Initially that accounting treatment works to suppress the reported size of pension liabilities but eventually the accounting turns around, and with a vengeance, as liabilities grow greater and greater. It’s a bit like a drug addiction, as CalSTRS needs to earn ever-greater investment returns just to keep pace with liability growth, much less to close a gap.

In other words, CalSTRS’s pension liabilities are compounding at a high rate and independently of investment returns.  While I’m sympathetic with the difficulty of explaining the nuances of pension accounting, once Ehnes started down the path he was obliged to provide a full and clear explanation. Besides, he wouldn’t have had to go into that detail had he not written a fiction in the first place.

The irony is that Ehnes and I are on the same side when it comes to CalSTRS’s bailout.  CalSTRS must be bailed out because if it isn’t, K-12 education in California will be decimated, as I explain here. The only question is how soon the bailout happens.  The longer it takes, the bigger the bailout required and the greater the unfairness to future generations.

It should go without saying that the CEO of any entity seeking a massive cash infusion– just the first annual installment sought by CalSTRS is nearly twice the state’s projected reserve and more than 10 percent of what the state provides schools each year — should be an explainer, not a dissembler. But also, CalSTRS is a public entity.  With distrust in government already a problem, the least a public-entity CEO should do is level with the people and adopt Harry Truman’s plain speaking instead of Dean Martin’s evasion.

Knowledgeable observers of pensions know why CalSTRS needs more money.  If CalSTRS won’t explain those facts in plain language to the people from whom it is asking an enormous sacrifice, others will do it for them.  In the meantime, get your own picture of how CalSTRS got to the point of needing all that money by reviewing its actuary’s report.  On pages 33-37, see for yourself that CalSTRS would require a fraction of the bailout it is seeking if benefits had not been enhanced. On page 26, see for yourself how CalSTRS’s liabilities (“Actuarial Obligation”) are relentlessly marching upward.  And — always, always — demand that your public officials tell the truth and in clear and understandable terms.

Link to original article: http://www.foxandhoundsdaily.com/2013/12/another-smokescreen-calstrss-ceo