The New York Times published a story over the weekend about the travails of a tiny public pension fund in California that raised alarms among those of us already fretting about the long-term sustainability of Colorado PERA.
It turns out that Calpers (California’s troubled version on PERA), which managed the little pension plan, keeps two sets of books: the officially stated numbers, and another set that reflects the “market value” of the pensions that people have earned. The second number is not publicly disclosed. And it typically paints a much more troubling picture, according to people who follow the money.
When the tiny fund decided last year to convert to a 401(k) plan, Calpers hit fund managers with the bad news: You’re not running a surplus; in fact you owe us more than half a million dollars. You see, when it came time to settle up, Calpers pulled out that hidden set of books. Here’s how the Times explained it:
The two competing ways of valuing a pension fund are often called the actuarial approach (which is geared toward helping employers plan stable annual budgets, as opposed to measuring assets and liabilities), and the market approach, which reflects more hard-nosed math.
The market value of a pension reflects the full cost today of providing a steady, guaranteed income for life — and it’s large. Alarmingly large, in fact. This is one reason most states and cities don’t let the market numbers see the light of day.
The implications are potentially enormous:
…it raises serious concerns that governments nationwide do not know the true condition of the pension funds they are responsible for. That exposes millions of people, including retired public workers, local taxpayers and municipal bond buyers — who are often retirees themselves — to risks they have no way of knowing about.
The problem reaches far beyond pensions, and into the $3.7 trillion municipal bond market. The reason is that municipal bond ratings take into account the strength (or weakness) of government pension plans. If those numbers have been consistently wrong, as dissidents argued, then actuaries were helping mislead the investors buying municipal bonds.