Lying About Asset Values

Public pensions today all lie about the value of their liabilities (with the worst funded plans lying the most) primarily because of flaws in actuarial methodology that mask true underfunding.  In the case of New Jersey the official liability value is $132 billion while the real liability number is about $250 billion.

As for the asset side the use of actuarial value instead of market as the official asset value is one lie but, in New Jersey anyway after examining in detail the value of Alternative Investments, it looks like they are also doing some more blatant lying that they get away with because they expect everybody to trust them and the professionals they buy.  I don’t.

The NJ Investment Council puts audited financial reports on their website wherein they list the Fair Value of Alternative Investments in the last few pages though they do not make it easy to do comparisons since they do not provide book values and everything is in pdf format.  You would have to get a good pdf extractor program and spend a few hours manipulating the excel spreadsheet to get some idea of the duplicity.

Here are those spreadsheets for the years ending June 30, 2010, 2011, 2012, and 2013 when the reported value of these investments increased from $10.4 billion to $20.2 billion.  There were a lot of new entries that appeared (and some that dropped off like Lehman Real Estate Pension II) but those that were on both the 2010 and 2013 listings showed some remarkable changes (especially those triple-digit percentage increases) that can best be explained by the state having to inflate asset valuers to keep contributions down.  The comparison spreadsheet has two sheets, the first listing all Alternative Investments alphabetically and the second listing only those held in 2013 that were also valued in 2010 sorted by percentage change.

Then there are the anecdotal comparisons which for three of the investments come from a Philadelphia Daily News story today that focuses on excessive fees:

But managers are still collecting their millions. Topping last year’s list, state documents show: $48 million for billionaire Wharton grad Daniel Och’s Och-Ziff Capital, where the state starting in 2010 has invested $450 million in “global diversified credit” investments…..
Among others, the documents show, New Jersey also paid fees totaling $14 million last year to ValueAct Capital Partners II, a San Francisco hedge fund where the state invested $150 million; it has yet to return a dollar. The state paid Canyon Balanced Fund, run by Canyon Capital Advisers of Los Angeles, $10 million last year; the state invested $125 million, and has received back $1 million so far. A Canyon affiliate was an investor in the failed Revel casino in Atlantic City.

The June 30, 2013 Fair Value of these three investments (presumably after the fees have been taken out) were:

  • Och-Ziff Capital: $811,409,573
  • ValueAct Capital Partners II: $200,144,344
  • Canyon Balanced Fund: $159,544,715
They say a new car inexplicably loses 20% of its value when you put it on the road.  For an Alternative Investment it looks like the value miraculously increases 20% – 80% once you put it in your public pension portfolio.

14 responses to this post.

  1. Posted by LGreene on September 1, 2014 at 8:43 am

    You do a lot of great work, but I wonder if it makes sense to call the actuarial methods ” lies” vs. management techniques that don’t give a clear picture. No one calls companies ” Liars” for the various accounting methods that are used to take deductions. Analysts call them accounting methods/gimmicks and then restate the data to give a better representation that the analysts uses for their own purposes. When actuarial values are GREATER thani market value, the taxpayers are asked to make a smaller contribution as the ARC.

    A lie is usually an attempt to deceive. These are methods that are used to help manage a complex funding vehicle.

    Your questions about the alternatives, however, are very much on point. Legislators should ask for more transparency and information, or demand that NJ divest these high expense, uncertain return investments.


    • Lying best describes it though I do see two levels.

      First there is the investment that you buy for $450 million, pay fees on of $48 million, and then value it (based on a number chosen by whoever sold you the investment) at $811 million. Without a detailed justifications of how the $811 million amount was arrived at the only logical explanation is that it was made up.

      The other level is how these assets are reported to the public. It would be easy enough to put book value next to the fair value along with fees associated (which was the complaint the Philadelphia Daily News had today: but, if they did that it would be too easy to see the manipulation.

      On the liability side it’s a spate of numbers often couched in jargon that provides the cover. On the asset side which is far easier for most people to understand (though not me) they do it primarily by throw more numbers out there without context and in formats that make it as hard as possible to penetrate.


  2. Posted by Tough Love on September 1, 2014 at 9:49 am

    It should be required that the SPECIFIC DETAILED procedures including all formulas and methodology be disclosed in the annual Audit Report so that the value assigned to alternative investments can independently be duplicated by a qualified outsider, given the data …………. because the easiest way to fudge the results is to CHANGE the “procedures” from year to year.

    Better yet, there should be an Audit Report REQUIREMENT that procedural CHANGES from the prior year be highlighted …. in an easily found a Report Section titled “Procedural Changes from Prior Year”……………. and with the word “procedural” VERY narrowly defined.


  3. Posted by hondo on September 1, 2014 at 11:10 am

    I like to say great work John you are truly educating us! Does the DP have to follow the rules from Dept of Labor same as 401? These are quotes “Fee disclosures resulting from the 2012 rule proved tedious and confusing, said Phyllis Borzi, assistant secretary for the Labor Department’s Employee Benefits Security Administration. “Some are filled with legalese, some have information that’s split between multiple documents,” Borzi said. What happen to “Fiduciary”? we are talking about our life savings. It should be easy to understand but, wall street lobbyist want to keep it this way.


    • The DOL took an active interest in fee disclosures for 401(k) since there were (and still are abuses) there. Administration fees are often tied to the amount of assets which is not a good predictor of the amount of work involved and for a lot of years those fees were hidden from participants who wake up one day ready to retire with a lot less than they anticipated.

      DB plans are a little different since, in theory, the employer (or PBGC) is supposed to make good on the promise. For public plans there is no PBGC and, in New Jersey’s case anyway, the employer is not proving to be too reliable. Once DOL starts making the connection that public plan benefits can be cut and excessive fees are a factor maybe we’ll see action there too.


  4. Posted by skip3house on September 1, 2014 at 1:10 pm

    Beyond understanding. Was just yesterday wondering how Revel cost was covered.
    How about clearing up the values by selling all, putting the cash into a mutual S&P fund, and dropping all investment charges?
    Two results…..the investments will have a recent non-lie selling value, and NJ will know its Pension values.


  5. Posted by Tough Love on September 1, 2014 at 11:23 pm

    As if we need another example of Public Sector Union thieves …. here’s a good one.

    John, take a look … the give-away to the retired Police and Taxpayer rip-off is just stunning.


  6. Posted by Javagold on September 2, 2014 at 2:39 pm

    Mark to Fantasy !!!


  7. Posted by hondo on September 2, 2014 at 8:20 pm

    Take the random walk !


  8. […] Then there’s the issue of criticizing a rate of return of 16.9% (or 15.9% or 15.5%).  Imagine you get any one of those as an annual return in your own portfolio.  Are you complaining?  The question in New Jersey is whether those Alternative Investment assets being reported are really there.  I don’t think so. […]


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