Originally posted on May 21, 2014 at 12:40 PM, updated May 21, 2014 at 12:54 PM
Our Johnson Center study, Pension Reform in Alabama: A Case for Economic Accounting, has sparked a healthy exchange between the study’s author, Eileen Norcross, and a lawyer for the RSA, Leura Canary (see here and here).
Norcross says our true unfunded liabilities are in the ballpark of $60 billion; Canary says our Johnson Center report is “inaccurate, misleading, and very irresponsible.”
In her comments, Canary tries to reassure everyone that the RSA is safe because it’s compliant with Governmental Accounting Standards Board (GASB) standards, but her response misses the entire point of Norcross’s work: America is one of the only places in the world that uses GASB (or anything close to GASB) for public sector accounting. The private sector doesn’t use GASB; Canada doesn’t use GASB; the UK doesn’t. And, thanks to some major flaws in GASB standards, the true funding gap we face in Alabama (and in almost every other state) is much larger than the officially reported amount. Norcross’s work is part of a large body of work that has discovered that our true liabilities for state and local public pensions across the nation are more than $4.5 trillion for all public sector funds instead of the reported $1.5 trillion.
The RSA and David Bronner understand the fair-market valuation methods used by Norcross and the true state of our public pension system. In fact, an RSA newsletter from May 2013 (page 1) even pointed out the fact that Moody’s, a major credit rating agency, is moving their valuation methods for public pensions closer to fair-market valuation techniques, which are the same techniques used by Norcross.
In commenting on the Moody’s change, Bronner notes this is going to make the RSA look very bad in terms of its true funding status (because liabilities will rise three-fold under the new standards). But, rather than acknowledge that it’s going to mean less benefits for workers or higher taxes for everyone, he nonchalantly dismisses the Moody’s valuation changes and says, “Moody’s is wrong, just as it was in the housing crisis that has brought great damage to our country.” That, my friends, isn’t an argument!
Like Bronner’s earlier dismissal of the Moody’s valuation change, Canary’s response today was more of the same: our leading public pension administrators in the state are simply dismissing hard accounting realities–realities the field of finance acknowledge are large in magnitude and affecting every public sector pension in the country.
Canary calls Norcross’s findings “worst case scenarios” and accuses Norcross and the Johnson Center of trying to scare pensioners. In fact, Norcross’s findings are reality at this moment. The worst case scenarios, which are the scenarios we are worried about too, will come about the longer the RSA waits to take their current dire funding situation seriously.
We know our RSA study has set off alarm bells within the RSA. Our hope, though, is that it’s a study that alarms many of you, the taxpayers, around our state: If the RSA continues to fall short of targeted returns and keeps making generous promises to new employees that are not being covered by sufficient assets, taxpayers end up making up the difference. It is taxpayers–ordinary people running businesses, students paying higher tuition, etc.–who are the ones really responsible for the RSA’s mess.
At the moment, the unfunded liabilities reported by Norcross mean every Alabama resident–men, women, children, public employees themselves, and prisoners–need to write a check of about $12,000 to cover all of the promises made to our 335,000 public employees!
Inaction, head in the sand accounting, optimistic assumptions about return, and taking on of more and more risk to chase after return just means the debt taxpayers will owe in the future is only going to get worse. Inaction and bad accounting means, in a nutshell, that the $12,000 check each of us would need to write today will, when looking back, have been one of the best deals we could have taken.
There are better paths forward for the RSA, and Eileen Norcross’s work recommends we follow states like Michigan and Utah and shift workers from defined benefit to defined contribution programs. But, the first step in the recovery process for public pensions is an embrace of accounting realities. The early responses from the RSA, unfortunately, suggest our pension administrators aren’t quite ready to even admit we have a problem.