Slackers are not just an American reality-TV-show phenomenon. They include state legislators across the U.S. who, unwilling to raise taxes or renegotiate public sector pensions and health benefits, play a game of chicken. Sometimes chicken means refusing to pass a state budget (that’s you, California and New York), resulting in furloughs for state employees. More often, it’s a game of three-card pension monte.
Until now, that was a problem only for taxpayers, it seems. But when states issue bonds to finance their expenditures, well now they become market participants. While New Jersey legislators may have been thinking “fudgeddaboutit,” the Securities and Exchange Commission said “gotcha” last week. In New Jersey’s funding of its Teachers’ Pension and Annuity Fund and the Public Employees’ Retirement System, the SEC charged that:
“the State made material misrepresentations and omissions regarding: (1) legislation adopted in 2001 (the ‘2001 legislation’) which increased retirement benefits for employees and retirees enrolled in TPAF and PERS; (2) special Benefit Enhancement Funds (‘BEFs’) created by the 2001 legislation initially intended to fund the costs associated with the increased benefits; (3) the State’s use of the BEFs as part of a five-year ‘phase-in plan’ to begin making contributions to TPAF and PERS; and (4) the State’s alteration and eventual abandonment of the five-year phase-in plan. These misrepresentations and omissions created the fiscal illusion that TPAF and PERS were being adequately funded and masked the fact that New Jersey was unable to make contributions to TPAF and PERS without raising taxes or cutting other services, or otherwise impacting the budget. Accordingly, disclosure documents failed to provide adequate information for investors to evaluate the State’s ability to fund TPAF and PERS or the impact of the State’s pension obligations on the State’s financial condition.”
This comes on the heels of accounting changes that would require state and local authority pension plans to use fair value estimates of their pension obligations. On that score, Andrew Biggs at the conservative American Enterprise Institute says that
“States report that their public-employee pensions are underfunded by a total of $438 billion, but a more accurate accounting demonstrates that they are actually underfunded by over $3 trillion. The accounting methods that states currently use to measure their liabilities assume plans can earn high investment without risk. Should plan assets fall short, as is likely, taxpayers are required to make up the difference. But the value of this taxpayer guarantee is not disclosed. As a result, while states recognize that their public-employee pensions are underfunded, the situation is far worse than their accounting demonstrates.”
Good-bye to near-certain 8% discount rates. Welcome to the muckier ~4.5% reality – and the politics of pension fund disclosure, full, true and plain.