Politicians Double Down on Investment Risk
BY FRANK KEEGAN
Anybody ˚who doubts whether public pensions can push state and local governments beyond a fiscal event horizon into a black hole of perpetual debt should read an auditor’s note in Montana’s latest annual report: “The Unfunded Actuarial Accrued Liability amortization period is infinite….”
Infinite amortization is accountant talk for eternal debt. It means Montana residents must forever pay taxes that will produce no government services or benefits for them of any kind.
Because pensioners are in line ahead of bondholders when it comes to picking taxpayers’ pockets, bond rating agencies get nervous if they cannot figure out how big pension debt really is.
No wonder the folks on Moody’s Investor Services teleconference explaining their proposed accounting protocols for public pensions sounded worried recently. Moody’s is proposing a fairly realistic 5.5 percent earnings rate and 13-year amortization period for calculating true pension debt.
If Montana with its 7.75 percent rate and 30-year amortization slipped underwater forever even based on official numbers, the overall situation nationwide is dire.
Rating agencies certainly can’t figure pension debt from Montana’s official numbers, which put the total unfunded pension debt at almost $3.9 billion in a state of about a million people. A billion is 1,000 million, so officially even babies need to cough up more than $3,900 each right now on top of all other taxes to pay this debt, a debt that continues to grow inexorably every year more than earnings and contributions.
However, Montana’s official numbers are lies. The real pension debt is about $10.5 billion when accounting tricks are factored out, according to calculations by economist Andrew Biggs.
Reality ups the pension tab to more than $10,500 for every infant, child, woman and man payable in full right now, or even more when stretched out to eternity as Montana auditors calculated. Politicians are indenturing the unborn and un-conceived.
They could pay it off by sinking all of the state’s personal and corporate annual income tax revenue into pensions for the next 78 years, simply not paying any public employees, buying anything, contracting any services or making bond payments.
Trouble is, the debt keeps growing every year as current and new employees accrue pension benefits.
Look at the most recent full fiscal year data available, from 2007 through 2010.
According to the U.S. Census survey of state and municipal pensions, Montana’s funds paid out $1.2 billion more than total contributions and earnings.
Funds lost almost 20 percent in value, the total obligation increase almost 21 percent, and total beneficiaries increased 9 percent. Earnings represented a return on investment of 2.64 percent. Overall, at the systems’ promised 7.75 percent discount rate used to calculate how much taxpayers actually owe, the funds would have had to grow about 68 percent in 2011 just to break even. They grew only 19 percent.
Moody’s joins Standard and Poor’s Rating Services, Fitch, the National Association of Bond Lawyers, Morgan Stanley and a growing array of credible voices warning that state and local politicians have made retirement promises that put municipal bond investors at risk.
At the teleconference in July, Moody’s asked for comments on proposed compromise accounting adjustments that nationally “would nearly triple fiscal 2010 unfunded actuarial accrued liabilities from $766 billion to $2.2 trillion.”
Applying that factor to Montana yields an unfunded liability of $10.3 billion for 2010 and more than $11 billion for 2011.
It just keeps growing faster than any earnings, economic growth, tax increases and spending cuts can ever pay.
The same is happening in virtually every state and municipality. And politicians are making it worse by pushing pension funds to take on more investment risk to camouflage how hopeless the crisis is.
As of first quarter this year, public pension funds nationally were flat to first quarter 2011, which means they fell to at least $1.5 trillion behind where they promised to be to pay benefits promised at the time.
As those liabilities grow, investment failure locks in the death spiral. According to Biggs’ latest calculations, the real total unfunded liability as of 2010 really was $4.6 trillion.
By now it must be more than $5 trillion, with the amortization period approaching infinity. It happened to Montana; it’s happening to states and municipalities all over America.
What’s the solution? One effective but painful remedy is to convert defined benefit pensions plans to 401k-style defined contribution.
Obviously the handful of politicians, contributors, “placement agents,” cronies, double dippers, spikers and others skimming fortunes off betrayal of public workers oppose any such solution.
For one thing, when politicians short contributions to defined benefit plans, workers don’t know until it’s too late. If they shorted contributions to defined contribution plans, workers would know immediately.
Those opposed to this solution actually have the chutzpah to cite the unfunded liabilities they created and Government Accounting Standards Board guidelines they manipulated as reasons for not doing it.
However, a recent study by the Laura and John Arnold Foundation proves those objections false.
But to get an idea how much this solution would save taxpayers, take a look at Montana. The state pension board asked consulting firm Cheiron for a study on what it would cost to shift the entire Public Employees Retirement System – one of 10 in the state – to defined contribution effective July 1.
As one reason not to do that, Cheiron cited the fund’s $1.6 billion unfunded liability, which taxpayers would have to pay off.
Montana taxpayers should accept the official numbers and take that deal right now because the real unfunded liability is almost $4.3 billion, applying the proposed Moody’s factor, and more likely about $4.7 billion using Biggs’ factor. It’s growing every day.
PERS is “not actuarially sound,” according to the state audit, and the amortization period for its debt is infinite. If taxpayers do not pay it off now at the official rate, they never will be able to.
Why? Because soon ratings agencies and bond lawyers are going to force governments to put more honest pension numbers above the bottom line instead of hiding phony numbers below the bottom line the way all do now.
Then the true cost of politicians’ public pension betrayal will begin to emerge. Taxpayers are stuck forever.
Frank Keegan is editor of the non partisan StateBudgetSolutions.org, a pro-reform project, the goal of which is to successfully engage political journalists and bloggers, state officials, and opinion leaders in a new way of thinking about state government and budgets, fundamental reform, transparency and accountability.
Email: frankkeegan@statebudget solutions.org