Wrapup Presentation Covering Public Pensions: Mary Williams Walsh - - PowerPoint PPT Presentation

Wrapup Presentation

“Covering Public Pensions: Mary Williams Walsh The New York Times June 3, 2011

The pension plan is underfunded.

So what?

Geraldine

Major Stakeholders

• Public workers
• Public retirees
• Taxpayers
• Municipal bondholders

Who champions Geraldine’s interests?

• Securities and Exchange Commission?—only to protect

the bond market if there’s a finding of fraud

• IRS?—limited authority over governmental pensions, and

no legal authority over funding

• Labor Department?—only oversees company pension

plans, not governmental plans

• GASB?—they have no enforcement power
• State attorneys general?—sometimes get involved, but

they represent the state

• “The market”?—it’s too hard to short municipal bonds
• Journalists—can shine a light on unsavory practices,

fairness issues, sustainability

No ERISA

• There was initially intended to be a second

law, called PERISA, but it fizzled out. It’s pretty hard to trigger a federal enforcement action because the main federal law doesn’t apply.

• You don’t have to break a law to cause
• harm. It’s possible to cause harm in an

attempt to do good.

Mexican debt crisis

• No one stole the money
• They were trying to do good, to develop

the country

• They financed it by taking on a lot of debt,

and securing it with rising oil prices

• Oil prices fell
• Pensions—an attempt to do good, secured

with stocks—and stocks fell

Is the solution taxing the rich?

Who are the local taxpayers?

Data on states and cities

• Municipal Securities Rulemaking Board

(MSRB)

• Electronic Municipal Market Access

(EMMA), fairly new, still expanding content

• http://emma.msrb.org/
• Has a tutorial on its site
• “Official Statement” is a factual overview
• f the community’s finances

Official statements have:

• Lists of the ten biggest employers—can

see how many are non-profits that pay no taxes

• Data on whether the population is

shrinking or growing

• How is the bond secured, in case there’s

a dispute?

• Description of pension promises
• Etc.

Look for discrepancies

• Pension data in Official Statement
• Pension data in the city or state CAFR
• Pension data in the pension fund’s CAFR
• Pension data in the actuarial valuation—if

you have a source who can help you read it

• Pension data in fiscal notes

The numbers should reconcile

• In New Jersey they did not—SEC action
• In San Diego they did not—SEC action
• Illinois?
• Rhode Island?
• Detroit?
• California?
• Etc.

New Jersey Diverts Billions, Endangering Pension Fund

Lead: In 2005, New Jersey put either $551 million, $56 million or nothing into its pension fund for teachers. All three figures appeared in various state documents -- though the state now says that the actual amount was zero.

Audited financial statement

Official Statement, appdx A

Official Statement, appdx D

Can’t explain the discrepancy

• Contributions are a cash number
• Not smoothed
• Not amortized
• Schedule 2 is normally very good data …
• … but the Official Statement must be right,
• r else the bond market it being given

false information

“Excess Valuation Assets”

New Jersey fiscal note

Benefit Enhancement Fund

Problem started in 1994

• Unanimous state supreme court order
• State’s school financing system was

unconstitutional

• “Abbott v. Burke,” filed in 1981
• A need to find hundreds of millions of

dollars, for 30 blighted urban school districts, by 1996

Difficult Time

• Governor Christine Todd Whitman had

campaigned on a promise to cut state income taxes by 30 percent over 3 years

• Two weeks before the court ruled, she had just

pushed a budget through the legislature

• One-third of state spending then went to

education

• Whitman said she believed the court order could

be met “through a reallocation of existing resources.”

Where will we find the money?

Actuarial cost methods used

• New Jersey had been on “Entry Age”
• Coopers & Lybrand advised switching to

“Projected Unit Credit”

• The new method is perfectly legal, but it

slows down the rate of new money going into the plan

• Suspicious legislators held public hearings
• Actuaries testified but never answered the

questions clearly

Context: the boom years

• New Jersey Education Association knew

what was happening and sued, unsuccessfully

• The stock run-up made it look as if there

was plenty of money and the change didn’t matter

• To pacify the teachers, Gov. Whitman

issued a Pension Obligation Bond

Benefit increase in 2001

• Tech bubble had already burst
• Fund had suffered significant losses
• State looked back to 1999, when the fund was

still flush

• Market value of assets was $5.3 billion greater

than the actuarial value, because of smoothing

• State officials grabbed that $5.3 billion difference

and treated it as “found money,” putting it into the “Benefit Enhancement Fund”

From audited financial statements:

Role of the S.E.C.

• No legal standing to protect pension plan

participants

• No legal standing to protect Geraldine
• Limited legal standing to protect municipal

bond participants

• Took action against New Jersey for

misleading potential bond buyers about the state’s financial condition

• Pension fund is still underfunded!

Contact me with questions

• Mary Williams Walsh
• maryw@nytimes.com
• Direct: 212-556-4271
• Follow up if you don’t hear back from me