Addressing media misconceptions about public-sector pensions and bankruptcy.

• Author: Picur, Ronald D.

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Everyone who pays attention to the news has noticed the drumbeat of reports urgently warning that the public pension system is perched on the brink of disaster and that it will soon collapse, bringing a number of state and local governments down with it. These stories are based on questionable research from self-proclaimed experts in public finance, and their predictions have created misconceptions about the health and future of the public-sector pension system.

Further context and balance is essential to clearing up these media misconceptions. Media outlets have been starting with a thesis--that a public pension crisis is upon us. They cite opinions and research studies that support their position without offering a counterpoint from professionals who understand public finance. Before rushing to publication, reporters should test their assumptions by vetting all their information and conclusions--otherwise, the picture presented isn't fair and balanced.

Providing perspective is a critical role for the finance officer, who should be able to respond to media inaccuracies and misunderstandings as well as providing rapid but measured responses to media inquiries or published articles. Finance officers can give the public the information it needs to preempt or correct the inaccuracies that are being reported. And of course, where real problems exist, it is essential to address them through formal action plans for solving the problems that involve all constituencies and stakeholders.

FANNING THE FIRE

Several common themes have evolved in media reports of pension valuations, bond defaults, and budgetary deficits. "The sky is falling" school of coverage features multi-trillion dollar amounts of supposedly unreported pension liabilities and so-called experts who predict state bankruptcies, bond defaults, and pension fund collapses. Recent examples include a New York Times article indicating that some states might not be able to make their bond payments (1) and the December 19, 2010, "60 Minutes" segment--"State Budgets: The Day of Reckoning"--in which Wall Street analyst Meredith Whitney warned about an impending widespread "financial meltdown in state and local governments." Both reports were based on questionable assumptions and neither mentioned the pension reforms many states--including Illinois, which was featured in both pieces--have enacted (see Exhibit 1 for a summary).

In addition, today's reporters are reporting yesterday's results, and they don't acknowledge the difference or the significant impact the Great Recession had on funded ratios for virtually all pension systems in 2009--along with most other public and private entities. (2) They also leave out the significant recoveries the equity market has experienced since then. By December 31, 2009, the Dow Jones Industrial aver age was up 59 percent from its March 2009 low, and by December 31, 2010, the rebound was 77 percent.

ONE POINT OF VIEW

Some of the newly minted experts on municipal finance who have garnered much attention for their research findings have casually dismissed or failed to acknowledge significant data that run contrary to their thesis that public pension plans are in crisis. Their research, which has material omissions, has not been subjected to standard academic or professional vetting. Nevertheless, it has been widely used to support the allegations that the sky is falling.

A case in point is the public-sector pension research by Joshua Rauh and Robert Novy-Marx. It has been cited numerous times in the Wall Street Journal, the New York Times, and the Washington Post, as well as untold local newspapers that subsequently picked up those initial stories. These articles offered no counterpoint from actuaries for public funds or from professional organizations such as the Government Finance Officers Association or the National Association of State Retirement Administrators.

MISLEADING GENERALIZATIONS

Some articles generalize from the specific to the universal. Consider the following headline: "Alabama Town's Failed Pension is a Warning." (3) The article discusses the City of Prichard's inability to make retirement benefit payments to its annuitants. The article factually notes that the town of 27,000 has lost 40 percent of its population, along with an even greater loss of its tax base. Nevertheless, the story goes on to generalize that the same fate might befall state pension systems in California and Illinois. It fails, however, to note those two states, as stand-alone sovereignties, would rank in the top 20 largest economies in the world, and therefore any comparisons to a town with a population of 27,000 are completely inappropriate.

A variation on this theme is the questionable use of statistics to imply that public-sector retirees who receive large pension payouts are representative of all public-sector pensioners, and that this is the cause of all public-sector pension funding issues. The following is from a May 2010 New York Times article: "According to pension plan data collected by the New York Times from the city and state, about 3,700 retired public workers in New York are now getting pensions of more than $100,000 a year, exempt from state and local taxes. The data belie official reports that the average state pension is a modest $18,000 or $38,000 for retired police officers and firefighters." (4) A few lines down, however, one discovers the following context: "Roughly one of every 250 retired public workers in New York is collecting a six-figure pension"--in other words, only 0.4 percent of all retired public workers in the state, or 3,700 of approximately 925,000 annuitants.

Another statistic missing from...