According to a blog post on the National Council on Teacher Retirement (NCTR) website (P/W=nctrinsight) :
Congressman Devin Nunes (R-CA) is poised to re-introduce his “Public Employee Pension Transparency Act”’ (PEPTA), based on a “Dear Colleague” letter that was sent to the U.S. House of Representatives on Tuesday, March 8, 2016, seeking cosponsors for the legislation. The letter states that PEPTA is necessary in order to “bring transparency and financial stability to state and local governments, which harbor trillions of dollars in hidden public employee pension debt.” Furthermore, it will “strongly encourage these governments to reveal the true cost of their pension promises and to reform their pension systems if needed to meet their obligations,” Nunes tells his fellow Members of Congress. Previous PEPTA legislation, which was first introduced by Nunes in 2010, would require that, in order to retain Federal tax-exempt status for their bonds, sponsors of State and local pension plans (other than defined contribution plans) must file an annual report disclosing their plans’ liabilities, as well as potential supplementary reports that restate these liabilities using a so-called “risk-free” assumed rate of return, with the Secretary of the Treasury. These reports would then be entered into a Federal database that will be accessible to the public. The bill also makes it explicitly clear that state and local pension obligations are solely the responsibility of those entities and that the Federal government will not provide a bailout.
I learned of this from Jeremy Gold on actuarialoutpost who identified the author as Leigh Snell, Federal Relations Director for NCTR, and the purpose of his blog piece to “attack PEPTA and the expertise of Josh Rauh and Andrew Biggs” which is accurate based on excerpts from that NCTR blog:
“Current Congressional offices could be easily influenced to support a new PEPTA bill if Nunes’ propaganda goes unchallenged,” warned Meredith Williams, NCTR’s Executive Director. “That is why it is so important for NCTR members to be sure that they contact their Congressional delegations now, making it clear that PEPTA is dangerous and completely unnecessary, and should definitely not be added to any Puerto Rico relief legislation,” he continued.
The current Nunes “Overview” of PEPTA claims that “public pensions continue to report grossly misleading information to taxpayers, retirees and public policy decision makers.” The reason for this, it asserts, is that the accounting system used by state and local governments to determine their pension liabilities “is not subject to oversight or regulation.” Instead, Nunes says it is just a set of “best practices,” promulgated by a standards-setting organization (i.e., the Governmental Accounting Standards Board, or GASB) that Nunes charges “is widely criticized for lacking the independence and funding necessary to enforce unbiased standards.”
The result, Nunes claims, is that “public pensions operate in a way that is inconsistent with the rest of the world of finance, making it very difficult for taxpayers, retirees, and policy makers to make informed decisions.” Using present governmental accounting standards, Nunes argues that the currently disclosed total of unfunded liabilities of $1.2 trillion, which he characterizes as about 7% of 2014 U.S. GDP and an “enormous number,” nevertheless “dramatically understates the true nature of the debt confronting taxpayers, because public pension plans are able to calculate their liabilities using self-selected and unreasonably high discount rates.”
Indeed, the Congressman claims that public pension plans “also severely distort fair market value of assets in order to hide debt,” and that when these “accounting gimmicks are excluded from the calculations,” unfunded liabilities in 2014 are “three times greater in magnitude, or $3.5 trillion (about 20% of 2014 U.S. GDP),” which, he reasons, is likely “substantially higher” in 2016 due to poor market performance since the end of fiscal year 2014.
(For a much more accurate understanding of these so-called “accounting gimmicks,” be sure to read “Understanding the Valuation of Public Pension Liabilities; Expected Cost versus Market Price,” by Paul Angelo, a well-respected senior vice president and actuary for Segal Consulting. In this article, Angelo expertly and very clearly explains how the current process used by public pension plans for measuring liabilities “imparts information about the issues that are most important to decision makers: the expected costs associated with funding promised benefits.” By comparison, the financial economists’ measures “are far less useful for public-sector plans because they are not designed to answer the critical questions facing policymakers, employers, and trustees related to the expected cost of current and future benefit obligations,” he writes.)
Putting economy theory aside, in practice, PEPTA would effectively require every public pension plan to essentially keep two sets of books. One would be the set that plans currently produce, which would reflect the reality of balanced investment portfolios—including stocks and other sensible investment alternatives as well as bonds—that have produced a median annualized investment return for the 25-year period ended December 31, 2015, of 8.3 percent, according to the most recent NASRA research.
The other set of books would pretend that all public plan assets were invested in U.S. Treasury bonds (even though this is not the case for any public plan), which currently yield less than 3 percent.
The result would be two substantially different measurements of a plan’s unfunded liabilities maintained by the Treasury Department. One set of numbers would be a substantially increased, artificial liability measurement that the use of the Treasury yield curve would produce, which, along with the unsmoothed valuation of assets, would significantly understate plan funding levels. This artificial set of numbers would differ substantially from those used to fund a plan or required for accounting and financial reporting purposes under GASB. The reporting of these two sets of numbers would only serve to confuse the public, failing to provide any clarity or transparency with regard to public pension accounting.
“If you have not yet responded to the NCTR and NASRA joint Federal Alert last month, asking you to contact your House and Senate members and object to costly and burdensome Federal mandates such as PEPTA, then I strongly urge you to do so now,” Williams concluded.
One final note. In the 2011 “Press Packet” on PEPTA that is still available on the Congressman’s website, there is a chart prepared by Professor Joshua Rauh, then at Northwestern University’s Kellogg School of Management and currently a Professor of Finance at Stanford University in California and a Senior Fellow at the Hoover Institution, a public policy think tank and research institution that is frequently described as politically conservative, also located at Stanford.
Professor Rauh is a strong proponent of “financial economics,” and believes that public pension plans should value their liabilities on the so-called “risk-free” rate, akin to the return on U.S. Treasury securities. He is perhaps most famous for his estimates of the dates that state pension funds “run out of money” and “pension payments to retirees will have to come out of general revenues,” to use his precise terminology.
Rauh advised Congressman Nunes when he was first developing PEPTA, and the Nunes materials contain Rauh’s projections. For example, Nunes/Rauh claim that seven states will run out of money before 2020, including Louisiana and Oklahoma in 2017. Furthermore, the Nunes materials state that these insolvency dates “are based on generous assumptions concerning the performance of pension plans and are likely the ‘best case scenario.’”
The only problem? If you check with your colleagues in Louisiana and Oklahoma, they will be happy to inform you that they are not going to completely deplete their pension assets by next year and have to make pension payments out of general revenues. In fact, as the Government Accountability Office (GAO)—an independent agency that provides Congress with audit, evaluation, and investigative services—said in a 2012 report, Rauh’s exhaustion dates were based on assumptions that it found to be “unsupported.” Indeed.
This is particularly delightful, given that Nunes’ current “Overview” proudly proclaims that “97 percent of financial economists,” including “experts from our nation’s most prominent schools of accounting and finance including MIT, Harvard, Yale, U.C. Berkeley, the University of Chicago, Princeton, and Stanford,” believe that state and local governments understate their pension liabilities, based on a 2013 survey, and that 92 percent of those surveyed believe that “absent change, public pensions would result in severe austerity budgets, a federal bailout or default in the coming decades.”
“I suppose Professor Rauh is still counted among those ‘experts’” observed Meredith Williams, dryly.
There is a lot to digest and rebut here and I will do so in a series of PEPTA Redux blogs to follow, starting next with the Paul Angelo paper.