Are Public Pensions Lying About Assets Too?

Public pension systems are understating the value of liabilities for benefits accruing in their plans primarily by using ridiculously high investment assumptions resulting, in the case of New Jersey, in reported liabilities of $124 billion when they really are $186 billion ($214 billion if COLAs return).  But there seems to be chicanery on the asset side of the ledger as well – aside from using a fictional ‘actuarial’ value that always seems to be higher than the market value.

In today’s New York Times there is a story about South Carolina’s retirement system investing half of its money in alternative investments on the recommendation of their former investment chief, a civil servant who made half-a-million dollars a year, drove a Lamborghini, and didn’t put a lot in his calendar.   I looked at the latest valuation report for the South Carolina plan and…….

it’s a disaster.  Look at these three pages of excerpts and you will see that the plan is spiraling to bankruptcy as $1.6 billion in contributions is coming in and $2.5 billion (and rising) is going out in benefits.  The fund has $26 billion as of 6/30/11 with half of that in ‘alternative investments’ which, according to ehow, are:

investments in assets other than stocks, bonds and other “traditional” investment vehicles. Some examples of alternative investments are stamps, fine wine and art. The popularity of alternative investments has increased in recent years due to the volatility of traditional investments. Valuing these investments relative to traditional assets can be somewhat difficult as the markets for alternative investments is not as sophisticated as stock and bond markets. For this reason, valuing such assets will typically require a greater degree of research on the part of the investor. While there is no definite formula to perfectly value these investments, certain factors are helpful.

For public pension plans the main factor looks like it’s the client’s need to inflate asset values so as not to raise taxes or cut benefits.
South Carolina’s fund made over $4 billion in earnings for the year ended 6/30/11 with the value of their alternative investments increasing by$3 billion. Last year in New Jersey the State Investment Council, which sets pension policy, raised the cap to 38 percent from 28 percent on how much pension money can be invested in hedge funds, private equity and other so-called alternative investments and the value of assets in the plan have only kept steady because of the ever-increasing valuations of that portion of the portfolio.
Actuaries have lied for years about the value of liabilities primarily because that’s what their clients expected, there was no regulatory incentive not to, and the public through the media were unlikely to wise up to their tactics.  Are investment advisers made of that much sterner stuff?

16 responses to this post.

  1. Posted by Tough Love on June 10, 2012 at 1:00 pm

    Is the a publicly available list of such alternative investments ?

    Such a mulit-list with year to year changes in value would expose such shenanigans.


  2. Thanks John, right on. Please read and propagate the study on asset allocation just published on SSRN. Authors call for “drastic reform.” Title says it all: “Pension Fund Asset Allocation and Liability Discount Rates: Camouflage and Reckless Risk Taking by U.S. Public Plans?” They are setting us up for a bigger crash. Link is here:


  3. Posted by Anonymous on June 10, 2012 at 6:53 pm

    John, have you ever asked Chris Christie if he agrees with your assessment of the current and future state of the pensions. If not please ask him or his representatives if they agree with your doomsday prediction. Afterall Chris Christie said that government workers would be thanking him in 20 years when they still have a pension.


    • Only time I ever spoke to Governor Christie:

      I did take a meeting in Trenton with an adviser (Gregg Edwards) and a budget person whose name I forget a couple of years ago where I and an ERISA attorney laid out the dire situation with public pensions but can’t tell if what we said took.


      • Posted by Anonymous on June 11, 2012 at 4:57 pm

        I thought Christie has claimed to have saved pensions already.


        • Posted by Tough Love on June 11, 2012 at 6:52 pm

          While what he HAS done is monumental for NJ, as a % of the reductions necessary, it’s but a small deposit.


          • Posted by TLisaseahag on June 12, 2012 at 7:48 pm

            He scared one fifth of public employees into early retirement making them collectors instead of contributors. He took the extra contributions that public employees are making and had the state treasurer deduct that amount from accrued liability therefore it never really improved anything. He has yet to make a payment and has given the state seven years to come up to a full payment at which time he will be working for Fox news or a health insurance company. The employee increases in healthcare do not keep pace with premium increases. But he would not dare put a cap on healthcare premiums because it would end his future. Other than that, great job Brownie!

          • Posted by Tough Love on June 12, 2012 at 10:19 pm

            In response to TLisaseahag:

            As long as the early retirements were not enhanced, their retirement is a net benefit (to Taxpayers) because their future Plan contributions would have been a small (less than 20%) percentage of the value of the incremental pension earned for future service. Essentially the taxpayers would have been stuck with a much LARGER pension liability had they stayed employed. Taxpayers also benefit from the retirement of those at the higher pay rungs associated with long service because, while we do lose experience and knowledge, rarely is the GROWTH in knowledge & experience after 10-15 years of service as great as the GROWTH in compensation. Replacements (where necessary) come at MUCH lower cost, especially if the position is outsourced.

            Quoting …”He took the extra contributions that public employees are making and had the state treasurer deduct that amount from accrued liability therefore it never really improved anything. ”

            So you are saying that there is no benefit (to the State and to Taxpayers) from the workers paying more of their pension and healthcare costs ? You should re-think that.

            Quoting …. “The employee increases in healthcare do not keep pace with premium increases. But he would not dare put a cap on healthcare premiums because it would end his future.”

            So, a governor should have the power to cap what a private company can charge for it’s product ? NJ tried that with Auto insurance about 15 years ago … creating a crisis as all the insurers fled the State. If you want to PAY LESS, you need to accept an inferior product, which in the case of health insurance many like to call it “rationing”. If you accept a policy with less coverage, yes, the price will go down. In a market with sufficient competitors, you generally get what you are paying for.

          • Posted by Anonymous on June 14, 2012 at 12:37 am

            The less Christie contributes now the more the taxpayer owes in the future. So the taxpayer must hope for pension system failure

          • Posted by Tough Love on June 14, 2012 at 12:56 am

            Responding to Anonymous ….

            To the extent the Public Sector unions bought (via their campaign contributions) favorable votes resulting in these excessive pensions, a “failure” to the extent these pensions are reduced to what they would have been in the absence of that collusion, seems quite appropriate.

  4. Posted by Larry Littlefield on June 11, 2012 at 3:06 pm

    Who cares what such “investments” are selling for in a zero interest rate environment with the federal government trying as hard as it can to keep the value of assets up?

    What matter is the total dollar value of benefits to be paid, and the total dollar value of dividends, interest and net rent from investments. Those cash revenues are what are, or should be, available to pay benefits. If you sell stocks and bonds today, what will you use to pay benefits tomorrow?

    The cash in from investments and the cash out to beneficiaries are unfudgeable. The money being paid out by, in particular, stocks, is not enough to justifiy the current prices at which a shrinking number of shares are being traded. When those trading prices go down, it will merely make it harder to fudge the problem that is already shown by the cash flows.


  5. […] John Bury catches some interesting info from the NYT: […]


  6. Posted by on June 13, 2012 at 7:13 pm

    to be honest I don’t know how the state pension does it …I have a 401k that is earning about 4% to 5% …since I’m retired I only draw what i made in interest and dividends for that year …I only buy quality stocks and a few bond etf’s , always holding 20% cash waiting for another sell off …I always feel like I’m on a high wire …but then again it’s my money I dealing with whereas with fund managers it’s just numbers


    • Posted by Tough Love on June 13, 2012 at 8:13 pm

      Wouldn’t YOU like to invest as aggressively as possible knowing that if you (the public Sector workers in the case of Public Sector pension Plans) have large gains, you keep them (often in the form of increased benefits), and if you do lousy, someone else (Taxpayers in the case of Public Sector pension Plans) make up for the losses ?


  7. “Spiralling to bankruptcy”‘, plus sundry bald accusations of lying – are you not just a little OTT here? That’s all rather hyperbolic language.


    • If anything I am coming around to seeing my language as overly (and unnecessarily) circumspect. No pension plan in the private sector sets out with a plan to invest 38% of their money in alternatives. This is a last desperate attempt at fooling those who require fooling.


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