Officials Hid Size Of Pension Crisis

SEPT. 22, 2010


Due to “Alice in Wonderland” accounting methods, the amount that taxpayers owe to provide pensions for local and state government employees is much larger – perhaps an extra $2.5 trillion – than government officials have let on, according to an economic advisor to Gov. Arnold Schwarzenegger speaking at a Securities and Exchange Commission (SEC) hearing in San Francisco on Tuesday.

“State and local governments utilize a misleading method for reporting the size of public pension obligations,” said David Crane. For example, an annual obligation of $30,000 for 25 years for a government employee’s pension is projected to cost the government $320,000, while the same $30,000/year, 25-year obligation in the form of a bond is projected to be $425,000. “Two identical and unconditional obligations owed by the same government are valued at different amounts. The answer lies in the Alice in Wonderland world of government pension accounting that allows governments to hide liabilities.”

Government officials justify the lower obligation for the pension based on the earnings they hope to receive by investing the money.

“That might be a legitimate outcome if the government and its taxpayers were no longer on the hook for the pension promises once money is deposited in the pension fund,” said Crane. “But that’s not the way it works. The government and the taxpayer stay on the hook. To put this in perspective, consider this: If Alice’s accounting could be applied to your mortgage obligation, then just setting up a trust account and projecting that account to earn a high rate of return on any deposit you make to that account would allow you to reduce the reported size of your mortgage. Now wouldn’t that be nice – at least until you had to make the payments on that mortgage. Which, of course, remain the same.

“As a result of Alice in Wonderland accounting, state and local governments are understating pension liabilities by $2.5 trillion, according to the Center for Retirement Research at Boston College. Note that these are not like Social Security and Medicare liabilities. These are contractual liabilities that cannot be changed, even by state legislatures or Congress.”

Because government officials are able to hide their future debt obligations in this way, they “are perversely incentivized to assume the highest rates of return in order to minimize reported liabilities, and then to swing for the fences in investing the capital of those funds in the hopes of actually achieving those returns, producing even more risk for the taxpayers who must make up for any pension fund shortfalls,” he said.

The chief investment officer of a large state pension fund recently said that investment returns in the 7.5-8 percent range are not unrealistic, according to Crane, adding, “Given that the capital in state and local pension funds is there to protect governments and taxpayers from having to dig further into their pockets to make pension payments for which they are on the hook, that official is effectively characterizing government and taxpayer capital as being in search of riskier investments.”

This fiscal fudging has led to the growth in the ticking pension time bomb in California. In 1999 the California Public Employees Retirement System (CalPERS) reported that its assets equaled 128 percent of its liabilities when in reality its assets totaled only 88 percent of liabilities, according to Alicia Minell, an economist in the Clinton administration.

“In other words, in 1999 using Alice in Wonderland accounting, CalPERS reported that assets exceeded liabilities when in reality liabilities exceeded assets,” said Crane. “Encouraged by that accounting, the state Legislature enacted a law that year boosting pension promises. The hidden cost from that boost has already hit $15 billion and will reach at least $150 billion for the state budget. More generally, after having reported that liabilities were a fraction of assets and projecting that the state’s pension costs would total $5 billion over the succeeding 10 years, the state actually incurred $25 billion over that period.

“California wasn’t alone in this regard. Unrealistic reporting of pension promises is a systemic problem. That’s why the SEC must require realistic accounting of public pension promises. For that to happen it must insist upon a realistic discount rate when reporting pension liabilities. In addition, the SEC cannot rely upon the Governmental Accounting Standards Board (GASB) to correct its ways and adopt realistic accounting. GASB is funded and governed by the very governments who would be forced to revise upwards their pension should a realistic discount rate be required.”

It remains to be seen whether GASB will restore fiscal sanity to pension accounting, but the board is looking into the matter, according to James Lanzarotta with the Moss Adams accounting firm. “Pension liabilities is one of the big topics of the day,” he said. “So they are currently deliberating on an improvement that would put the liability on the financial statements at amounts that are a lot closer to the expected future payout, the discounted present value of the expected valuation. That’s in contrast to what’s done today. Today the liability is measured based on what the actuary said the annual requirement would be for funding versus what the government actually contributed. So it would be quite a change from current practice.”

The SEC will also be looking further into government pension accounting practices, according to SEC Commissioner Elisse Walter. Noting that the issue “is quite complex,” she said that future SEC hearings “will continue to explore these topics.”

The all-day SEC hearing in San Francisco was the first of five that will be held around the country in the coming months to find solutions for problems in the $2.8 trillion municipal bond market. Other issues raised at the hearing include clarifying the differences in regulation of the municipal and corporate bond markets, and the need to level the playing field for individual investors, who have less access to information on municipal securities than institutional investors.

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  1. David
    David 22 September, 2010, 16:46

    Great report from the SEC hearing. Gubernatorial advisor Crane explained this problem clearly.

    Reply this comment
  2. Tough Love
    Tough Love 23 September, 2010, 09:53

    The provisions in Public Sector Pension Plans for CURRENT(yes CURRENT) as well as new workers should be approved/granted based upon what the TYPICAL Private Sector Taxpayer gets as a pension.

    To the extent that Private Sector taxpayers (as a group) do NOT get a particular benefit or rich formula, NEITHER should the Civil Servants whose Pension/Benefits are 80-90% funded via taxes paid by the Private Sector.

    To put this in perspective, Public Sector pensions & benefits are CURRENTLY so much higher than those of comparably paid private sector workers, that Public sector pension Plans need to be reduced by 50-75% just so that they would no longer EXCEED those of the Private Sector.

    The Private Sector has been hoodwinked long enough !

    Reply this comment
  3. Fake OCO
    Fake OCO 23 September, 2010, 10:34

    too little too late-we are doomed and are now BK.

    Whether the state admits it or not-we are Bk and those pensions are not being paid in full.

    Reply this comment
  4. boprn
    boprn 23 September, 2010, 10:46

    Good to see Tough Love and Fake OCO buying into the usual party line…..however, there is some truth to what Crane says.

    Reply this comment
  5. Tough Love
    Tough Love 23 September, 2010, 14:21

    Dear boprn,

    So tell me genius, with Public Sector pay now higher than that of COMPERABLE jobs in the Private sector (per the US Gov’t BLS), why should Private Sector taxpayers fund (together with investment earnings thereon) 80-90% of the cost of Public sector pensions that are 2-4 times greater in value (4-6 times for Safety workers) that what the comparably paid Private Sector worker gets when retiring at the SAME age and with the SAME years of service?

    Perhaps you are just peachy-keen with this arrangement …. because you (or a relative) is riding the Civil Servant gravy train?

    Reply this comment
  6. boprn
    boprn 23 September, 2010, 15:10

    Hey Tough Love. Why don’t you come over to my house and do some work. After, I will tell you that I can’t afford to pay you. End of argument right there.

    And all your numbers are bovine defecation. I worked for a long long time underpaid compared to the private sector…a very long time, knowing that the pension would be waiting. The 80-90% thing…your joking, right? 4-6 times….ROFL. You are clueless, led by politicians who have zero idea what they are talking about.

    Keep buying it sucker. All the while those same politicians are putting more into the welfare system, assisting their buddies into shipping jobs off-shore, giving themselves special bond deals/stock deals – and you believe them….LOL. They actually have you thinking that some smuck who works for the state, doing a job for some agency that the people voted to have….you believe THAT guy is the problem.

    I guess, in the end – your the ‘genius’.

    Reply this comment
  7. surfcitybob
    surfcitybob 23 September, 2010, 16:09

    We need to make some modifications to the RICO Act and go after the politicians and labor union bosses for what is plainly a crime against the taxpayer’s. I would like to see both the politicians and the labor union bosses sitting right next to the City of Bell criminals in court.

    Thank goodness as a taxpayer I can leave the state when taxes get too high and let them figure out how to pay their own pensions!

    Reply this comment
  8. boprn
    boprn 23 September, 2010, 16:45

    surfcitybob –

    You got cheap labor for decades, and now that you have to pay for it – its time to skip out? You must be a republican. Gotta be…..

    Reply this comment
  9. Algernon Moncrief
    Algernon Moncrief 23 September, 2010, 16:46


    Obviously, legislators around the country are not quite as sophisticated as their counterparts in Colorado. It never occurred to them that they could just pass a bill stating “Oh, by the way, we are no longer bound by our contractual obligations.” Simplicity itself! This approach makes life much easier in difficult budgetary times, and takes the burden off of GASB, state and local governments, plan sponsors and the SEC!

    Under Colorado’s “contract breachin’ plan”. . . . . you simply seize vested, accrued, earned, contracted benefits from retirees and pension members (incredibly, with the help of your local union lobbyists) until your unfunded pension liabilities are sufficiently reduced to raise your funded ratio. This plan also improves the status of your bonded debt (keepin’ those SEC fellas happy).

    If you’re as brazen as we are in Colorado you claim that your goal is to achieve a 100 percent funded ratio, instead of the 80 percent level that is considered well-funded in the industry. May as well go for the full 100 percent, no one understands all this pension mumbo jumbo out here in the west.

    The 100 percent goal provides lots of wiggle room for unexpected investment shortfalls, or needed under-funding in the future. Also, here’s another ingenious provision that we invented. If it happens that God provides you with a lame pension investment staff, they consistently underperform their benchmarks (last year we underperformed by about a billion), and accordingly you have an investment loss for the year, no problemo, just state in the bill you enact that retiree contracted benefits will be further cut to accommodate the loss! My guess is that when pension investment staff around the country hear about this sweet no-accountability gig they are going to beat a path to Colorado PERA. Where can I get that kind of a job? To be fair, credit for finding this solution should go to the bright administrators at Colorado PERA. You can imagine how difficult it is psychologically to advocate a course of action that you yourself have earlier declared illegal, (see this excellent Denver Post article.)

    We know it’s burdensome for busy pension administrators (particularly short timers) to have to tell elected officials that they really ought to make their annual required contributions . . . it’s much easier to just let those unfunded liabilities build up year after year after year, until you have a good pile, then wipe the slate clean with a good contract breachin’!

    Our Colorado pension administrators are straight shooters. They’ve been telling us for a couple years now, “We can’t invest our way out of this.” Now they’re keeping their word . . . by missing their investment performance benchmarks by wide margins.

    Meeting contractual obligations? Performing your fiduciary duty? Acting in a moral fashion? No need to fret about these things. We looked into it in Colorado and dang if they haven’t been optional all along. Hello state and local governments . . . round up those rascally debt problems and herd ‘em out west to us in Colorado, we’ll fix ‘em right good fer ya!
    (Visit for more info.)

    Reply this comment
  10. Tough Love
    Tough Love 23 September, 2010, 16:51

    Quoting Boprn … “And all your numbers are bovine defecation. I worked for a long long time underpaid compared to the private sector…a very long time, knowing that the pension would be waiting. The 80-90% thing…your joking, right? 4-6 times…”

    Perhaps you were paid lees than your private sector counterpart 20
    years ago …. certainly not in the last decade.

    And no, Private Sector taxpayers do fund (together with investment earnings thereon) 80-90% of the cost of Public sector pensions that are 2-4 times greater in value (4-6 times for Safety workers).

    The proper way to validate what I’m saying is calculate the ratio (A) divided by (B), where (A) is the accumulated value of your (the employee) contributions with interest (say using 6%) to your retirement date and (B) is the value of your monthly retirement benefits discounted at interest (also at say 6%) and appropriate mortality also to your retirement date.

    The resultant ratio represents the proportion you funded. FYI, it’s usually 10-20% of the total cost, with the Taxpayers funding the 980-90% balance.

    I know you won’t believe me, go so ask an economist or actuary. They’ll validate what I’m saying.

    Reply this comment
  11. Tough Love
    Tough Love 23 September, 2010, 17:00

    Quoting surfcitybob …”Thank goodness as a taxpayer I can leave the state when taxes get too high and let them figure out how to pay their own pensions!”

    You right, and that’s the best weapon we (Private Sector) taxpayers have. You know that $5,000-$10,000 per-person IUO to fund the Greedy Civil Servants’ pensions & benefits ….. well until the Feds allow CA to set up a border ala East Germany, we can leave the state w/o paying.

    Then all the Civil Servants can just pay each other … $100K in taxes &
    $100K in pensions.

    Happy days are here again.

    Reply this comment
  12. boprn
    boprn 23 September, 2010, 17:18

    Tough Love –

    Tough. If you don’t like it vote for different people. Leave the state. Whatever you want to do…just do it. Have seen enough of your posts on various boards to know your FOS, and disgruntled that you did not pass a background check for some sort of job. All city/county/state employees in California were hired with certain pay/benefits in place, just like you were at McDonald’s. People are collecting the pay they were promised by their employer, just like you.

    Not to long ago, when the stock market was booming, those in 401s did very well. I know my father made a killing. At the time, govt employees weren’t making out so well in retirement BECAUSE they were in ‘defined’ benefit programs. Even though CalPers was making a killing their payout was already ‘defined’. So what happened? The state/local govt’s stopped contributing to CalPers. By your way of thinking, the retirees should have been complaining about all the $’s the private sector employees were getting because their 401s weren’t ‘defined’. But there was no such complaint. The fact there was no complaints speaks of the quality of people the govt hires vs the quality your local McDonald’s hires. Now times have changed (however brief), and govt retirees are getting the better end of the deal – you whine like a little baby. Times will change again, and the 401 retirees will again rule the day. What do you propose when that happens?……and its not to far in the future.

    Keep believing the party line. I used to care six months ago, don’t anymore. Hope you get azz-raped for all the taxes possible.

    Reply this comment
  13. Tough Love
    Tough Love 23 September, 2010, 17:46

    boprn …

    Do you have an escape plan for when CA sinks financially due to the greed of you & your ilk.

    How long do you think the gas station, the grocer, your mortgage company will accept CA’s “IOUs”.

    CA’s insolvency (and the demise of your generous pensions) is just around the corner.

    Reply this comment
  14. boprn
    boprn 23 September, 2010, 19:07

    TL –

    Its very easy for wife & I to live out of state. Can buy a place now, and am looking at this time. Don’t need any ‘IOUs’. No mortgage, 1 1/2 years of food on hand, live close to work. You see, I’m prepared – are you? As far as ‘greed of you & your ilk’. ROFL. I worked in the medical for the state for roughly 50% of what I could make on the outside – and had plenty I MEAN PLENTY of offers in the private sector. Was working for the retirement so the wife and I could enjoy old age. Now that were just about to retire, I see people like you (who have zero clue of the truth) popping up with opinions. It ain’t greed, it really isn’t even that much of a retirement check – but we earned it under contract. Your always welcome to join – there is about a 50% vacancy rate in what I do. Just need to be clean as a whistle with some sort of medical degree, willing to deal with felons (many of them) on a daily basis. Willing to get stabbed, gassed, (have been both) & so on. You couldn’t hack it, I can tell you that. As far as Calif going into ‘insolvency’ – WHO CARES. Doesn’t mean CalPers is insolvent. It is a first line creditor of the state, along with bonds.

    How about addressing the real problems – welfare, corrupt politicians, workman comp scmamers, illegal aliens & all the benefits they drain. You don’t care about that in any of your posts – here or elsewhere. Do you ignore those things because you are an illegal sucking welfare money? Or are you just a coward?

    Lastly – piss off.

    Reply this comment
  15. Tough Love
    Tough Love 23 September, 2010, 19:35

    1 1/2 half years food on hand ….

    Sounds like your a redneck/skinhead practicing paintball and waiting for the invasion ?????

    Reply this comment
  16. boprn
    boprn 23 September, 2010, 20:40

    Don’t give up so easy. I don’t want to defeat you, but to go on hurting you.

    Don’t yell KAAAAHN so quickly.

    On the 1 1/2 year supply – if you are ready to get prepared, check out
    wisefoodstorage com

    On the $$ side, but worth it. Its not ‘redneck/skinhead’ to have your family prepared in case of national emergency, war, economic breakdown. It is the smart thing to do, and most of the people I work with have done the same. Of course they are all a bunch of govt types, nowhere near as smart as them there privatized types….


    Reply this comment
  17. SeeSaw
    SeeSaw 23 September, 2010, 22:02

    TL is the only commenter I have seen call for a blending of the public and private sector salary schedules and pension plans. I don’t think there is any plan to even consider doing that. It would be trying to compare apples with oranges, as I have stated as many times as TL rants the opposite. The DB pension plans have been operating in CA for 97 years. The private sector pulled out of the DB business of their own accord, and they can get back in the same way.

    My spouse has his blue collar DB plan frozen in 1986, because the developers and builders decided they did not need to deal with the union any longer, since they could hire the illegals for a fraction of the cost. This would not have happened, if the private sector had kept the same policy with illegals as the public sector. You will not find any illegals working in the public sector.

    My CalPERS check flows into my bank account on time every month, and I have not heard anything from them, to the affect that they will have to stop paying me soon. The portfolio stands at 212 billion today, so I’m not too worried. In the meantime, I will rely on them to let me know what is happening. Their crystal ball is probably better than Fake’s.

    As far as IOU’s go: The Legislature needs to get in gear soon, because it is not fair for vendors not to be paid, and they will soon have to be paid with IOU’s. The State workers will not be paid with IOU’s, because the law requires that they be paid with real money.

    Reply this comment
  18. Tough Love
    Tough Love 24 September, 2010, 05:54

    Hi Seesaw …. nice to hear from you again (really). At least you’re not freaky like bobpn ….

    Just to clarify, I have never called “for a blending of the public and private sector salary schedules and pension plans.” … not sure where you came to that conclusion.

    What I advocate for is (in comparable jobs … and I know defining such is not always easy), to have comparable TOTAL COMPENSATION (pay + pensions + benefits) in the Public & Private Sectors. This seems a very “fair” societal goal to me, and today, due to relatively equal “cash pay” but much much much higher pensions & benefits in the Public sector, the Public sector has a big unfair advantage.

    Reply this comment
  19. SeeSaw
    SeeSaw 24 September, 2010, 10:49

    Tl: I suppose the word should have been “comparing” rather than blending. If you go trying to compare private and public sector workers with advanced educational degrees, such as doctors, engineers, etc., you will get a shock when the results come in. The public and private sector workers do not want to keep sniping at each other. They just want to get on with it–they can choose where they want to apply for work.

    Reply this comment
  20. SkippingDog
    SkippingDog 24 September, 2010, 11:21

    Tough Love lives in New Jersey. He’s all over the boards there with his slobbering man-crush on the Gov. He just doesn’t have anything better to do than give his 2-cents everywhere he can.

    Reply this comment
  21. Tough Love
    Tough Love 25 September, 2010, 18:38

    SkipingDog … I believe I contribute legitimate facts (as well as my opinion) to a very important and problematic national concern.

    What do you contribute except continued efforts to protect your “turf”?

    Reply this comment
  22. goinggalt
    goinggalt 26 September, 2010, 06:10

    It all comes down to the math. The country is broke. The only way all these public pensions will be funded is if the taxpayer pays for it. As a taxpayer I can tell you I’m not paying for it.

    Reply this comment
  23. eatingdogfood
    eatingdogfood 30 March, 2013, 07:30

    It’s Over Folks; Really Over !!!

    Reply this comment
  24. eatingdogfood
    eatingdogfood 30 March, 2013, 07:32

    Blame The Unions And The DemoRats !!!

    Reply this comment

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