We are all in search of positive news and April’s market performance is certainly welcomed, especially on the heels of the first quarter’s devastating results. The Milliman 100 Public Pension Funding Index showed an aggregate 5.92% performance increase for the month – great! Unfortunately, the industry, as it relates to public plans, continues to only focus on the asset side of the equation. In the article highlighting April’s gains, funded ratios were also mentioned and they showed an average “jump” from 66% to 69.8%, but pension liabilities were no where to be found.
We all know that GASB permits public pension plans to value their liabilities at the ROA for discounting purposes, but who is that helping? It isn’t helping the plan trustees who make critical decisions based on one set of books. It isn’t helping the taxpayer who believes what is being reported to be “true”. It certainly isn’t helping the plan participant, who is likely making long-range plans based on the assumption that the promised retirement benefit will be there when they call it a career.
As an example, NJ’s big three pensions – Teachers, P&F, and Employees – have aggregate assets of roughly $80.5 billion (through 4/30). They are reporting liabilities using a 7.3% discount rate of $176.7 billion for a funded ratio of 45.6%. In actuality, the liability is actually $372.2 billion when using an appropriate valuation using a true mark-to-market discount (1.42% in this example). The funded ratio is actually less than 1/2 that which is being reported at 21.6%.
As anyone knows who has read these blog posts for the last 4-5 years, we are huge fans of DB pension plans, but we can’t be doing the same old, same old. It is nearly impossible to tackle an issue if you don’t know the true magnitude of the problem. Many of today’s pension issues have to do with the accounting rules, as they lack consistency. There is no justification that we operate with two sets of guidelines for valuing pension liabilities. The argument that public plans are perpetual doesn’t carry any water with me. Just because something on paper appears to be perpetual doesn’t mean that it is sustainable. Just ask the folks in the Jacksonville, FL Police and Fire plan. As contribution expenses eat up more and more of state budgets they are encroaching more and more on precious resources needed to fund other elements of the social safety net.
We need to adopt one set of books that will lead to the full funding of these plans and not some gimmick that inflates the ROA so that public plans can keep contributions low. This practice has done significant and long-term harm to pension systems throughout the US.