Government pensions, including CalPERS and the other public pension plans in California, are permitted to use far laxer accounting standards than private pension plans. This allows them to greatly overstate how much money they have and to understate future liabilities, something which does not bode well for the financial health of the funds or for those relying on the money for retirement.
Yes, you got that right. Federal government rules allow their own pensions, as well as state and local pensions, to ignore rules that private funds must follow. This is almost as egregious as the federal government saying the Too Big To Fail banks (and them alone) do not have to mark to market and instead can price their often toxic assets at whatever they want. Thus, they can pretend that dicey mortgages and properties are worth what they were valued at when the deal happened and not what they are worth now, which is often sharply less. Thus, their financial situation can pretend to be far healthier than it actually is.
Public pensions can pull the same tricks, in effect cooking their books (and doing so quite legally.) But by doing so, they are also cooking the retirement plans of millions by pretending that money is there when it isn’t.
Private pensions can smooth market changes out for 2 years provided the fluctuation isn’t more than 10%. Public pensions can spread that out over 15 years with a 40% fluctuation allowed. They can amortize debt over 30 years instead of the 7 years allowed for private funds. It gets worse. Public funds can assume future rates of return that private pensions can’t. CalPERS assumes a 7.75% return, something Warren Buffett calls “crazy” and “nuts,” especially when you consider that CalPERS has averaged 4.3% for the past ten years.
Why is this “pretend and extend” bogus accounting allowed for public pensions but forbidden for private pensions? This is far more than just an alternate way of accounting. It permits public pensions to pretend they have far more money than they actually do and to extend the problems into the future for the inevitable day when someone besides them will have to deal with the mess of having their rickety, financial house of cards finally collapse.
Recently, CalPERS received $2 billion from California to meet their funding shortfall. Had they been required to follow private pension rules, the state would have had to give them $7 billion. What, you didn’t know CalPERS can force the state to give it money? Why yes it can, and the state can’t say no. Goodness, how cozy is that! Of course, this gives the state ample reason to play along with fantasy financial statements based on bogus numbers because then, they can pay less to CalPERS and the other state funds.
All of this is made worse by often inept ‘investing’ by CalPERS. They lost $500 million of retiree money on a disastrous New York City apartment investment in 2009 and recently lost 92% of their money on desert land in Arizona. Both deals were described as hugely speculative by real estate insiders. Investing in dicey real estate at the top of a bubble is not a responsible way to manage retiree money, nor is allowing lax rules for public pensions.
(crossposted from CAIVN)