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
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
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
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.