Bringing truth to the pension debate
The increasing cost of municipal pension plans has recently caused mild hysteria among reporters covering muniland, and some of their coverage has been overdone. To pick one example, several weeks ago the homepage of the New York Times screamed that cities in New York State had to borrow from the state fund to pay its annual pension contributions. What this article overlooked was the fact that the state plan is already over 100 percent funded and that delaying communities’ payments would place no stress on the state plan. Moreover, the local communities could have skipped their annual payments, and the New York fund would remain the healthiest in the nation.
As the article illustrates, pension promises and actuarial projections are hard to verify. Some have used this to their political advantage to claw back benefits that public workers have already earned. We in the media have often swallowed it whole because it’s complex stuff.
A recent article that avoided this trap appeared yesterday in the Bond Buyer article and had to do with officials exaggerating pension fund woes for political gain. Often these public exaggerations directly conflicted with what bond offering documents say for the officials’ communities. Some are alleging that this opens up the officials who made the misstatements to violations of anti-fraud provisions of securities laws. From the Bond Buyer:
Robert Klausner, a principal at the Plantation, Fla.-based law firm of Klausner, Kaufman, Jensen & Levinson, said public officials frequently overstate pension and budget problems for political gain. He said officials’ public statements often contradict annual reports, bond statements and reports to rating agencies.
Klausner, who works on municipal retirement issues, is representing unions in lawsuits against Miami and Baltimore seeking to reverse changes in pension plans. The cities cut benefits in recent years, citing financial troubles. But despite such woes, the two cities have recently secured A-level credit ratings, he noted.
“We are seeing announcements of doom and gloom as a justification for cutting employee benefits,” he said. “And at the same time, the people who say, ‘It’s disastrous,’ go to bond raters and say, ‘Everything is great. We are paying our debts.’ ”
If this is true, the knock-on effect of these exaggerations could be substantial. There have been sweeping changes across the country in public pension plans, as the Government Accountability Office noted in a report this month:
Since 2008, the combination of fiscal pressures and increasing contribution requirements has spurred many states and localities to take action to strengthen the financial condition of their plans for the long term, often packaging multiple changes together. GAO’s tabulation of recent state legislative changes reported by NCSL and review of reforms in selected sites revealed the following:
• Reducing benefits: 35 states have reduced pension benefits, mostly for future employees due to legal provisions protecting benefits for current employees and retirees. A few states, like Colorado, have reduced postretirement benefit increases for all members and beneficiaries of their pension plans.
• Increasing member contributions: Half of the states have increased member contributions, thereby shifting a larger share of pension costs to employees.
There is no doubt that public pension funds are often underfunded and have granted benefits, e.g., one state’s 6 percent annual cost of living adjustments, that are not sustainable. Pension plans suffered especially big investment losses in the last two financial crashes of 2000 and 2008. To get these plans on a firm track, it’s imperative that everyone operating in the public sphere use the most consistent and accurate data. Fitch Ratings just published a template to judge the comparability of combined state debt and pension liabilities between states. We need more of this kind of effort. The threat of a potential SEC investigation hangs over officials after high-profile findings in San Diego and New Jersey of fraudulent statements made in bond-offering documents. The threat of regulatory sanction is a good second line of defense, but the public’s insistence on the truth should be the first.