Wolf Richter www.testosteronepit.com [4] www.amazon.com/author/wolfrichter [5]
That state and local government pension funds are going broke isn’t a new problem. That it’s much worse than reported by those pension funds isn’t a new problem either. Last June, when Moody’s Investors Services [6] proposed four fund accounting adjustments, it determined that the already dizzying unfunded pension liabilities were actually three times higher than reported. But now there is a new problem: how trustees across the country blow money that their squeezed pension funds don’t have on an exotic boondoggle.
Moody’s wants to cut through the smoke and mirrors of pension-fund accounting. Hence, its four adjustments. Though it can’t force governments to change their accounting practices, it can lower their credit ratings. So here in financially challenged California, John Dickerson (www.yourpublicmoney.com [7]) applied these adjustments to the pension fund numbers as reported by the six counties in the Bay Area and the North Coast with independent pension funds. I’ll use one of them, Contra Costa County, as an example (PDF [8]) because it will crop up again in our boondoggle story.
The pension fund reported total unfunded liabilities of $1.215 billion. After Moody’s adjustments have been applied, they explode to $3.519 billion. It gets worse. To paper over pension deficits, governments issue Pension Obligation Bonds (POB), which are often not reported as liabilities by pension funds. Pension funds grab the cash, governments hold the debt. When Contra Costa County’s $516 million in POBs are included, total unfunded pension liabilities rise to $4.037 billion—over 3.3 times the reported amount.
The massive shortage means that the fund won’t be able to pay the benefits it has promised its employees. Benefits will have to be cut, belts around retirees tightened. Taxpayers and employees will have to pay more. Taxpayers may have to bail out retirees outright. Municipalities have gone bankrupt in order to sort out this mess.
So, California Watch shocked us [9] with its report that four independent municipal pension systems, including Contra Costa County Employees’ Retirement Association, are paying for up to five trustees each to attend a conference. Not in Los Angeles or San Francisco or Berkley. But thousands of miles away, in ... Hawaii. For six days in May, at the Hilton Hawaiian Village Waikiki Beach Resort, with plenty of time off to play, surf, roll around the beach, or stare, sweating glass in hand, at the chicks by one of the five pools.
Well actually, this being California, it didn’t shock us. But it’s not just here. The National Conference on Public Employee Retirement System [10] marketed the shindig across the country. It expects about 1,000 attendees, including 800 trustees. Registration fees can run over $1,000, plus airfare, 5 or 6 nights at the hotel, and other expenses. The money comes from taxpayers, employees, and retirees whose pensions are at risk because there isn’t enough money.
Contra Costa County is sending five trustees. The pension funds of the city of Los Angeles, Los Angeles County, and San Diego County will also send trustees. Combined, they reported $17.5 billion in unfunded pension liabilities. And based on Moody’s adjustment, reality could be three times higher, so perhaps over $50 billion.
Expecting resistance, the conference offers a “2013 Attendance Justification Tool Kit [11]“ for trustees who have trouble finding the right words to explain exactly why that trip to Hawaii and six nights at the Hilton Hawaiian Village Waikiki Beach Resort are essential for the survival of the strung-out fund and its billions in unfunded liabilities. The Justification Tool Kit includes a well-written “sample justification letter,” a Word document that you can download and “edit to personalize your message.” Or you can just fill in the blanks.
There are also “7 Tips for Building Your Case for Attending the Annual Conference”—crucial things to do and say to bamboozle everyone into agreeing that that expense is the best investment the fund ever made. “Focus on the issue at hand,” is the first recommendation. Truly an excellent Justification Tool Kit.
Other pension plans send their trustees to in-state seminars, which are a lot cheaper and fulfill any educational requirements just as well. “It’s real easy to keep it in California,” explained Greg Frank, a management analyst at the San Joaquin County Employees’ Retirement Association.
Given that the funds are short billions, the expenses for this boondoggle don’t even amount to a rounding error. But when taxpayers and employees have to pay more, and when retirees have to accept smaller pensions, or watch their fund blow up or get restructured in bankruptcy, then it would be appropriate for trustees to display a crisis mentality. Because a crisis it is. And a shindig in Hawaii isn’t going to solve it.
When Moody’s Investors Services, based on its adjustments, begins recalculating the effect of these unfunded pension liabilities on credit quality, it will eventually result in across-the-board slashing of municipal-bond credit ratings and numerous municipal bankruptcies in California. For that debacle, read.... California Pension Death Star Approaching [12].