WASHINGTON May 29 Public pensions are
misleading people about their true financial state and need
major reforms, a top U.S. financial regulator said on Thursday,
launching the latest strike in a long-running political battle.
Since the 2007-2009 recession, political leaders and voters
have worried about the ability of public pension funds to cover
retirement promises made to government workers that are often
protected by law.
Most pensions have made reforms, but a recent report from
Fitch Ratings indicated they still have a large funding gap.
"Trillions of dollars in liabilities -- reflecting amounts
promised to state and local government workers -- are not
appropriately reflected on government books, thereby seriously
misleading investors about the riskiness of their investments in
municipal securities," said Daniel Gallagher, one of the five
members of the Securities and Exchange Commission, which
regulates U.S. financial markets.
"In the private sector, the SEC would quickly bring fraud
charges against any corporate issuer and its officers for
playing such numbers games," he also said in a presentation to
the Municipal Securities Rulemaking Board, which writes the
rules for public sector debt that the SEC enforces.
At the end of 2013, public pensions were $1.1 trillion short
of the $5 trillion in benefits they had promised, according to
Federal Reserve data.
During the recession states and cities cut contributions to
retirement systems to balance their budgets just as the
financial markets wiped out the investment returns that provide
the bulk of pensions' revenues.
Gallagher, who warned last year of an impending "Muni
Armageddon," hit every area of public pensions, saying that the
current system saves "elected officials from making the hard
Many pensions calculate the rate for discounting their
future liabilities and then forecast a comparable investment
rate of return, typically between 7 and 8 percent. Gallagher
said the practice was "contrary to fundamental tenets of
financial economics: liabilities should be valued at a rate that
reflects their risk, not the risk of the assets."
Pensions should discount liabilities at rates closer to 3
percent or 5 percent, he said, which will make their liabilities
appear much larger. At the same time, he said they should expect
investment returns closer to 6 percent, which could then swell
funding gaps, given investments provide two-thirds of public
Next month, new standards from the Governmental Accounting
Standards Board will go into effect on pension accounting. While
Gallagher said the board, which sets accounting practices for
the public sector, took "a step in the right direction, there is
more than needs to be done."
The new standards leave room for state legislatures to hide
"the true extent of underfunding," burn cash, and do not
eliminate the incentives to chase yield, he said. He also
criticized them for not requiring pensions to disclose the
contributions that actuaries suggest state and local governments
should make each year to the plans.
(Reporting by Lisa Lambert; editing by Andrew Hay)