Yet another great report on Bloomberg. Keep up the good work!
March 3 (Bloomberg) -- The Chicago Transit Authority retirement plan had a $1.5 billion hole in its stash of assets in 2007. At the height of a four-year bull market, it didn’t have enough cash on hand to pay its retirees through 2013, meaning it was underfunded to the tune of 62 percent.
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Public pension funds across the U.S. are hiding the size of a crisis that’s been looming for years. Retirement plans play accounting games with numbers, giving the illusion that the funds are healthy.
The paper alchemy gives governors and legislators the easy choice to contribute too little or nothing to the funds, year after year.
The misleading numbers posted by retirement fund administrators help mask this reality: Public pensions in the U.S. had total liabilities of $2.9 trillion as of Dec. 16, according to the Center for Retirement Research at Boston College. Their total assets are about 30 percent less than that, at $2 trillion.
With stock market losses this year, public pensions in the U.S. are now underfunded by more than $1 trillion.
That lack of funds explains why dozens of retirement plans in the U.S. have issued more than $50 billion in pension obligation bonds during the past 25 years -- more than half of them since 1997 -- public records show.
The quick fix for pension funds becomes a future albatross for taxpayers.
In the CTA deal, the fund borrowed $1.9 billion by promising to pay bondholders a 6.8 percent return. The proceeds of the bond sale, held in a money market fund, earned 2 percent -- 70 percent less than what the fund was paying for the loan. The public gets nothing from pension bonds -- other than a chance to at least temporarily avoid paying for higher pension fund contributions. Pension bonds portend the possibility of steep tax increases.
By law, states must guarantee public pension fund debts. [...] With the recession that started in December 2007, cities and states are running huge deficits [...]. The economic downturn gives state legislatures another reason to cut back on funding pensions.
[...] Fund accountants [...] set unrealistically high expected rates of return to reduce governments’ annual contributions. And they use smoothing techniques to paper over investment reverses so they make losing years look like winners [...] which can delay governments catching up with losses for more than a decade.
This ruse can pass the buck to future taxpayers, who will pay for the retirement benefits of today’s government workers.
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The Teacher Retirement System of Texas, the seventh-largest public pension fund in the U.S., reports each year that its expected rate of return is 8 percent. Public records show the fund has had an average return of 2.6 percent during the past 10 years.
The nation’s largest public pension fund, California Public Employees’ Retirement System, has been reporting an expected rate of return of 7.75 percent for the past eight years, and 8 percent before that, according to Calpers spokesman Clark McKinley. Its annual return during the decade from Dec. 31, 1998, to Dec. 31, 2008, has been 3.32 percent, and last year, when markets tanked, it lost 27 percent.
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A government retirement plan can’t go bankrupt, even if it’s insolvent; state treasuries must put up the money if a fund runs dry.
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Actuaries consistently permit public pension funds to report artificially high expected rates of return -- most often 8 percent and as much as 8.75 percent. That’s more than the 6.9 percent billionaire investor Warren Buffett sets for his Omaha, Nebraska-based Berkshire Hathaway Inc.’s pension fund.
“Public pension promises are huge and, in many cases, funding is woefully inadequate,” Buffett wrote in his 2008 letter to shareholders. “Because the fuse on this time bomb is long, politicians flinch from inflicting tax pain, given that the problems will only become apparent long after these officials have departed.”
New Jersey Governor Jon Corzine, a former co-chief executive officer of Goldman Sachs, has proposed allowing government pension funds to put off half their pension contributions because of the state’s growing deficit during the recession.
Corzine’s suggestion follows a recent New Jersey pension track record of mistakes. When the state’s pensions were healthy in the 1990s, the state legislature eliminated nearly all of its annual pension contributions for almost a decade, while adding $4.6 billion of benefits.
New Jersey sold $2.75 billion of pension bonds in July 1997. Then-Governor Christine Todd Whitman said at the time that the bonds would save taxpayers $47 billion and make the system fully funded.
“You’d be crazy not to have done this,” Whitman said in a Bloomberg News interview in June 1997. “It’s not a gimmick. This is an ongoing benefit to taxpayers.”
New Jersey’s pension bonds haven’t saved taxpayers $47 billion. To date, the state has lost more than $500 million on those bonds, according to state records.
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