ANOTHER TAKE ON THE PENSION FUSS - Inaccuracy and dishonesty may be a fact of life, but it’s particularly disappointing to read the frenzied attacks of those who challenge pension funds for using “inaccurate” funding and reporting numbers – when those very attacks are dependent on numbers and scenarios ginned up by the authors to support their own misleading claims.
Public employee pensions have been under attack since the early part of the past decade. Governor Schwarzenegger advocated eliminating defined-benefit plans and converting all public employees’ pensions to 401(k)/defined contribution-style plans. After City of Bell officials’ pension abuses came to light, public outcry for pension reform grew louder, and soon, local ballot measures were popping up across the state to “fix” what many saw as a broken retirement system.
What followed was a lot of hype and rhetoric on this subject, but the Los Angeles Police Protective League and United Firefighters of Los Angeles nevertheless worked with the City of Los Angeles to pass meaningful pension reform. Our police officers and firefighters have always paid the employee contribution toward their pensions, and they’ve never been allowed to “pension spike.” Still, the new reforms raised the amount employees contributed and based the retirement-pension formula on workers' average salaries during their two highest-paid years, not a 12-month period.
Understanding the answers requires dispelling some pension myths. The overstated alarm and concerns over huge “unfunded liabilities” were based on changes resulting from new rules in the pension accounting system. Governmental Accounting Standards Board (GASB) Rule 45, adopted seven years ago, required that public pension systems publically disclose “their unfunded liabilities.” Before GASB Rule 45, these same “unfunded liabilities” existed; they were just never disclosed. Disclosure does not affect pension systems’ fiscal stability, but many who don’t understand pension systems use it anyway as a means of political attack.
Jack Humphreville’s latest screed against the Los Angeles Police and Fire Pensions plan, “Dirty Deeds Impact the Fire and Police Pension Plans,” is the most recent example of an attack wholly based on the same numbers manipulation of which he accuses others.
Humphreville drags out, for the umpteenth time, the debunked argument that the pension plan uses “phony actuarial gimmicks” to understate the plan’s unfunded liability. He once again bleats the tired refrain that only by using the “market” value of the plan is the true liability known, and that the “smoothing” of gains and losses should be abandoned.
Humphreville may be a very smart man, but this attack exposes his lack of understanding of the way public pension funds are operated and financed. His views have been completely rejected by the GASB, which over the last two years has revisited and rewritten the accounting standards for pension boards. Humphreville, however, charges on because only by using inapplicable standards can he make the pension fund shortfall into the crisis he wishes to portray.
Predictably, he again attacks the long term 7.75 percent return assumption used by the Los Angeles Fire and Police Pensions (LAFPP) fund. Never mind that the 10- or 20-year return is much different. Humphreville claims that over the next 20 years, the fund cannot possibly achieve that rate. He points to CALPERS, which will review a potential change from 7.75 percent to 7.25 percent later this year, and he also cites Warren Buffett’s suggestion that the next 20 years will only yield 6 percent.
The fact is, LAFPP’s fund has handily beaten CALPERS for the past 20 years, something conveniently omitted from Humphreville’s story. And while Buffett is certainly a prodigious investor, he’s not an infallible predictor of future events. He reported in February 2012 that he will lose all of a $2 billion natural gas investment he made five years earlier, admitting he “…totally miscalculated the gain/loss probabilities” when he made the investment, which was predicated on his belief natural gas would rise in price in the future.
However, the most bemusing part of Humphreville’s attack was the suggestion that the City is in crisis because everything is done behind closed doors. LAFPP meetings are public, and members of the public can address the Board of Fire and Police Pension Commissioners; I challenge Humphreville to appear before the Board and share his views and wisdom. Humphreville likely won’t because he knows his diatribes, written behind the “closed doors” of his office, cannot stand the light of day if presented in public to informed persons willing to debate his spurious claims.
(Tyler Izen is President of the Los Angeles Police Protective League.)
Tags: LA Police Protective League, United Firefighters, employee pensions
CityWatch
Vol 10 Issue 22
Pub: Mar 16, 2012