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….
Read the rest of this entry »