A new white paper by Chris Tobe, a chartered financial analyst and a former trustee for the Kentucky Retirement System, asks: “Did the SEC and S&P let 14 states destroy their Pensions?” Tobe’s question shifts the blame for public pension shortfalls from generously compensated public workers to legislators, the credit-rating agencies and the SEC. His thesis is that some states’ legislators knowingly failed to make required annual payments to the pension fund and instead spent the money on current services such as teachers’ salaries and new roads. Tobe further alleges that credit-rating agencies and the SEC were asleep at the wheel about the problem and bear some of the blame.
State pension funds have an estimated $900 million shortfall, according to the Center for Budget Research. I think Tobe is looking in the right corners for the culprits. Public workers do have generous retirement plans, and the financial crisis certainly created enormous losses for pension funds. But these losses, in many cases, were layered on top of plans that were already poorly funded. From Tobe’s white paper:
The current political rhetoric on public pensions that blames gold plated benefits and high investment assumptions misses the most basic fundamental problem. The dirty little secret of at least 14 states is that politicians have misled the public as both political parties have conspired to secretly borrow $100’s of billions from their pensions.
Public pensions are exempt from ERISA, so there is no direct federal regulation, and state regulation of public pensions has proven itself ineffective at best in most states. As states borrow money through the municipal bond market there are regulators and independent reviewers who are supposed to provide investors with an honest view of state finances. These are the only watchdogs. This paper asks why both the SEC and S&P and Moody’s fell down on this job.
Tobe then gets into the dirty details of the nation’s most poorly funded pensions: