State Treasurer Bill Lockyer today resigned from a pension advisory panel of the Stanford Institute for Economic Policy Research, questioning the methodology and conclusions in the think-tank’s new public pension study.
The SIEPR study, released today and authored by former Assemblyman Joe Nation, D-San Rafael, estimates the state’s unfunded public worker pension liability at almost $500 billion and calls for pension reforms including benefit reductions for current employees.
“When it comes to public pensions, maybe SIEPR should stand for ‘Stanford Institute to Eviscerate People’s Retirement,.’” Lockyer spokesman Joe DeAnda said today. “Nation approached Lockyer to join the advisory panel after Lockyer strongly criticized SIEPR’s April 2010 report on public pensions. Lockyer agreed to join the advisory panel because he believed SIEPR was interested in producing more thoughtful, evidence-based reports. Unfortunately, that turned out not to be the case.
“While Nation may have listened selectively to certain advisors, Lockyer certainly wasn’t one of them, and his concerns about methodology and other issues were ignored. SIEPR clearly has a public pension agenda, and it doesn’t include legitimate research.”
UPDATE @ 4:40 P.M.: This just in from Joe Nation (you’ll need to read Lockyer’s criticisms of the report after the jump in order for this to make sense, but I didn’t want to bury Nation’s reply) —
I am disappointed that Treasurer Lockyer has decided to withdraw from our effort to reform California’s public employee pension systems. I do not recall any specific suggestions from him (since he was unable to attend any meetings) or from his staff on methodology, but his statement suggests that he believes that we should have considered only one discount and investment rate, 7.75 percent. In direct response to his statement:
Table 8 of the report is correct. The “roughly 6 percent” rate noted is indeed the discount rate used by most corporations for reporting the present value of pension fund liabilities. As the Treasurer no doubt knows, corporations are required to use a different discount rate for reporting liabilities than the rate they use as an assumption for returns on assets set aside to meet those liabilities.
Regarding investment return assumptions, I share the Treasurer’s concern about corporations that — like California’s pension funds — are employing unrealistic assumptions such as the 7.8 percent figure he refers to in his statement. I reference Warren Buffett’s letter on this very point. As he points out, when it comes to dangerously inflated assumptions of returns on pension fund assets, both corporations and governments are guilty.
Our report assesses pension financial health using discount rates from 4.5 percent to 9.5 percent. Even in the 9.5 percent scenario, which is very unlikely based on either historical performance or current projections, CalPERS and CalSTRS are unable to meet their obligations. Lockyer’s fixation on a 7.75 percent rate is precisely the reason that pension systems find themselves in poor conditions. And repeating private sector mistakes doesn’t help us. Just as we saw with Lehman, AGI, Bear Sterns, and others, understating debt and betting our financial future on unrealistic assumptions will only make the problem worse. In fact, each day that we ignore the public pension crisis costs California $3.4 million that could be better spent on education, social services, and protecting our environment.
Finally, other researchers have concluded that CalPERS and CalSTRS are in worse shape than we describe. Alicia, Munnell, a Democrat member of Clinton’s Council of Economic Advisors, uses methodology that put CalPERS at 56 percent funded and CalSTRS at 39 percent (far lower than our assessments). A consensus is growing that aggressive action is needed to reform our broken pension system. I hope Mr. Lockyer will consider re-joining that effort.
Grant Boyken, Lockyer’s top pension aide, e-mailed Nation today with Lockyer’s resignation. Read the full text of that e-mail, after the jump….
I’m writing to request that Treasurer Lockyer’s name be removed from the list of advisory panel members on the pension reports SIEPR announced it will release this week.
Despite requesting drafts to review last week, the Treasurer’s office did not receive any until today. I’ve only had time for a cursory review, but it appears some of the concerns raised by the Treasurer and other advisory panel members over the past eight months have not been adequately addressed.
Table 8 of the draft for the statewide report states that the assumed rate or return for private sector plans is 6%. A report by Pension and Investments magazine, however, notes that the average assumed rate of return for corporate plans was 7.8% in 2010. I think the report may be confusing discount rate with expected rate of investment return. In any case, the broader issue with the comparison of private and public sector funding and accounting methods for defined benefit plans is that it ignores some key reasons why there are different rules and practices in the private sector. It makes sense for private sector companies, which can go out of business, to use a lower discount rate.
The governance reforms outlined in the report seem to take it for granted that changing the composition of retirement system boards will lead to better performance without citing the body of research on this issue, some of which points to better performance by boards whose members are also members of the retirement system and have a greater stake in board decisions. If lack of financial expertise is the cause of the collapse of public pension funds, what caused the collapse on Wall Street?
The report calls for reducing benefits of current workers. While the report does note that “most observers suggest that benefits for current employers are vested rights…” it fails to fully consider the legal hurdles that such a reform would confront. With very limited exception, reducing benefits of current employees is prohibited by numerous published legal decisions in California over the past half century that have established public employee retirement benefits as contractual obligations entitled to Constitutional protections.
At the outset of the project you emphasized the need for recommendations that are fair, sustainable, and based on fact. We agree, but believe that “fair and sustainable” ought to be defined to include not only consideration of the level and cost of benefits that employees and governments can afford, but consideration of the ability of every worker, whether employed by government or the private sector, to maintain a decent standard of living in retirement, and consideration of the financial burden that will be borne by state and local governments if pension benefit changes leave retired workers destitute and in need of public assistance.
My understanding is that CalPERS, CalSTRS and the UC Retirement System have not had time to review the findings and provide feedback; nevertheless, and without their advice or comment, you seem to feel compelled to issue this report no matter what. A thorough review by the pension systems is crucial to ensuring the accuracy and credibility of the SIEPR report. Your unwillingness to consider their expert review should cause any observer to wonder what academic or public policy standards you are bringing to bear on these important questions.
For these reasons, the Treasurer is no longer willing to be a member of your advisory panel, whether in the listing of advisory members for this report or for any future effort of SIEPR.