Pensions & Investments' reference to projections made in studies by Joshua Rauh, et al., (“Tough decision looms,” Editorial, Nov. 1) as if they are matters of fact, is as misleading to your readers as the studies themselves. A glimpse beneath the veneer of these studies would reveal specious methods and assumptions that are used to arrive at the startling conclusion that most public pension plans face near-term insolvency.
For example, the authors assume that over the next decade, public pension plans will receive no contributions to pay down their unfunded liabilities. Since fiscal year 2001, the average annual required contribution paid to public pension plans exceeds 90%, and a majority of plans can be reasonably expected to continue to receive their full contribution. Many states and cities mandate payment of the full pension contribution. Simply wishing away these contributions, as do the authors of these studies, does not mean the contributions won't be paid. With the rest of the media that has reported these findings, P&I has an obligation to question this assumption.
Another method used in these and like studies is the application of a corporate-style pension accounting standard to value public pension liabilities. This method uses current interest rates, which conveniently are at multidecade lows, to project the cost of future pension liabilities. Yet, after taking into account written comments and hearing oral testimony from dozens of individuals reflecting a wide range of views and backgrounds, the Governmental Accounting Standards Board recently “considered but rejected” this very method, stating, “The rate used should be a reasonable estimate of the rate at which plan net assets are expected to grow, over a term commensurate with the accounting measurements for which the rate is used, as a result of investment earnings.” In other words, the body responsible for setting standards for calculating public pension liabilities has specifically rejected the method used in recent studies to contend that the public pension sky is falling.
The liability projections in these studies are wildly inconsistent with the findings of the professional actuaries who are trained and certified to make such calculations. Were those making these projections professional actuaries, their professional standards would preclude them from reporting these dramatic results.
How public pension liabilities should be valued, whether current public pension investment return assumptions are appropriate, and whether GASB in its present form is the optimal governance model for determining public sector accounting standards, are all reasonable questions and fair game for debate. But these projections, made on the basis of methods and assumptions of one's own choosing, ought to be called out for what they are: an opinion.
National Association of State Retirement