In their magnificent study about eight centuries of financial folly (“This Time Is Different”), economists Ken Rogoff and Carmen Reinhart lampoon the low level of accuracy with which governments maintain their books: “”Think of the implicit guarantees given to the massive mortgage lenders that ultimately added trillions to the effective size of national debt, the trillions in dollars in off-balance sheet transactions engaged in by the Federal Reserve . . . not to mention unfunded pension and medical liabilities. Lack of transparency . . . is almost comical.”
It’s also expensive. In a recent study, Alicia Munnell, a member of President Clinton’s Council of Economic Advisors and now director of the Center for Retirement Research at Boston College cited one example:
“In 1999, the California Public Employees’ Retirement System (CalPERS) reported that assets equaled 128 percent of liabilities, [after which] the California legislature enhanced the benefits of both current and future employees. If CalPERS liabilities had been valued at the riskless rate, the plan would have been only 88 percent funded. An accurate reporting of benefits to liabilities would avoid this type of expansion . . ..”
In other words, in 1999, CalPERS reported that its assets exceeded pension liabilities when in reality liabilities exceeded assets. Encouraged by that accounting and a CalPERS sales document, the State Legislature enacted a law (SB 400) boosting pension promises as Munnell describes. The cost to taxpayers from that boost has already hit $15 billion and will reach at least another $150 billion. To add insult to injury, that cost grows every day that the current California State Legislature maintains its refusal to repeal SB 400.
Munnell’s paragraph may be found in a recent Boston College study entitled “Valuing Liabilities in State and Local Plans.” Echoing recent scholarship at Stanford, Northwestern, the University of Chicago, and the Federal Reserve Bank, the study reaches the conclusion that “the obligations of public pension plans should be discounted at a riskless rate of interest” and joins the growing chorus calling for honest public pension fund accounting.
But as Rogoff and Reinhart lament, “governments will go to great lengths to hide their books when things are going wrong, just as financial institutions have done in the contemporary financial crisis.” As if on cue, government employee unions in California and the pension fund board members who do their bidding are going to the greatest lengths to resist truthful accounting of pension liabilities, just as AIG and Lehman resisted truthful reporting of credit-default swaps and off-balance sheet loans.
The reason is obvious: just as honest accounting would’ve exposed the truth about Lehman and AIG, an honest accounting approach to public pensions would increase the reported size of state pension liabilities nationwide to $5 trillion. For California alone, pension liabilities would be reported at $800 billion, $500 billion of which is unfunded. Worse, pension funds are resisting honest disclosure even though they know first-hand how Californians have already suffered from the deceptive accounting of 1999. Not long after CalPERS reported that it was over-funded, that over-funding disappeared. Where did it go? The answer is that it never existed.
State-sponsored pension funds must honestly report liabilities. Until and unless taxpayers no longer have to guarantee pension payments and make up for pension fund deficiencies, they deserve that truth.
Link to full article: http://www.foxandhoundsdaily.com/blog/david-crane/7760-hiding-their-books