It’s NO secret. Wall Street investment divisions have been anxious to get their mitts on the funds in public employee pension funds for a long time. Why not? It’s a $3.7 trillion – yes, that’s trillion with a T – sector. However, as we’ve noted here recently, there’s some table setting to be done. First, the general public has to be convinced the money would be in better hands on Wall Street. A previous post called the vultures “accomplished looters,” and in order to loot the funds some table setting must be done. We have a nice example of how this is done compliments of Moody’s.
In September 2013, Moody’s reported that public pension liabilities had tripled to $2 trillion from 2004 to 2013. [Reuters] Wow! Look! Look and See! My oh my, what a terrible awful increase, a spike, a spiral, and all other things egregious and horrifying. BUT WAIT! Take a deep breath, all things are not as they seem.
How did the ratings agency come up with that number? It didn’t take long, October 9th actually, for the National Association of State Retirement Administrators to note the interesting way in which Moody’s had calculated the number. [Reuters] Why was there such a dramatic difference in the old numbers and the new ones?
“Controversially, Moody’s changed its methodology for assessing pension liabilities in 2013, lowering the discount rate to assess the present value of liabilities and using a market valuation for assets instead of the industry practice of smoothing liabilities over a number of years.” [Reuters] (emphasis added)
If you guessed that Moody’s manipulated the calculation to show a dramatic increase in public pension fund liability over the last nine years, you’d be right. Moody’s also fiddled with the characterization of the number – Is it a funding requirement? That would be NO. As NASRA advised: (pdf)
“By Moody’s own admission in prior pronouncements, the adjusted pension liabilities calculated by Moody’s do not represent a funding requirement. Yet the report makes no effort to clarify that vital fact. Instead, readers are left to infer that the “quadrupling” of unfunded liabilities represents an amount that must be made up with additional contributions.”
In other words, Moody’s ‘new’ number made it sound like the pension funds were four times deeper in liabilities than before 2004, and made no effort to prevent anyone from thinking that this would have to be a “burden on taxpayers.” So, since last September the ‘fish fork’ Moody’s slipped onto the dinner table in the form of a manipulated and mischaracterized number has been sitting there waiting for some state legislator or state conservative think tank to use to ‘prove’ state pension funds are in trouble and should be handed over to … who else? … Wall Street.
Moody’s place setting for this dining experience also included some dodgy work with the cake fork and dessert spoon – somehow Moody’s didn’t factor in the reduction in value, in real dollar terms, of public pension funds due to inflation in the last ten years. Moody’s also insinuated that public pension funds “fell short in their investment goals” from 2010 to 2013, because they lagged behind the S&P. That’s rather like saying the dessert fork is only to be used on Devil’s Food, because like all diversified investors, public pension fund management doesn’t use one single asset class (like the S&P) as a benchmark for evaluating its entire portfolio.
When Moody’s planned the meal for its investment house diners it seems to have intended that those evaluating the public employees’ plans were to gasp that the salad and fish course knives had been misplaced by the management. It’s so hard to get good help these days?
“The report accuses public pension funds of seeking high returns and increasing investment risk by increasing allocations of alternative investments. The report does not include the fact that these allocations are also part of an effort to diversify and lower risk. Indeed, the report makes no effort to measure the actual risk being taken by public pension funds and makes no reference to the risk/reward tradeoff. The report also ignores that private equities, the primary type of alternative investment, has been the highest performing asset class for most public pension funds during the last decade.” [NASRA] (emphasis added)
Interesting? A report intending to reinforce the notion that public pension funds are not being well managed and could better be handled by the professionals on Wall Street, somehow forgot to measure the actual risk incurred by the current management.
Moody’s messed with the meat service as well – misstating the aggregate value of state and local pension fund assets as $5.29 trillion instead of the actual amount as calculated by the Federal Reserve of $3.7 trillion. And, then there’s the part wherein Moody’s ignored that which will not serve its narrative:
“Although the report makes passing references to pension reforms approved in recent years, in fact, since 2009, nearly every state has made material changes to its benefits structure, employee contributions, or both. As a result of these and other factors, on a GAAP basis, annual public pension liability growth has fallen below five percent for five consecutive years. As the investment losses of 2008-09 are fully recognized in actuarial calculations, and as the substantial investment gains since 2009 are actuarially recognized, public pension funding levels will improve sharply, and unfunded pension liabilities will fall.” [NASRA]
It doesn’t matter how cleverly one sets the table, what Moody’s served up was toxic, and the fact that its report has been on that table since last September doesn’t make the meal any more palatable. Moody’s appears to have forgotten that Wall Street’s own incapacity to curb its appetite for risky trading, trades in which they couldn’t even put a realistic value on their own transactions, was part of the “unfunded liability” problem faced by all investors, including pension funds, in the wake of the 2007-08 debacle.
Nor has Moody’s paid attention to the probability that pension funding levels are predicted to improve, and therefore the unfunded liability will decline. Why? Because this is the precise opposite of the Great Wall Street Narrative – how can they possibly convince city councils, county commissioners, and state legislators to allow Wall Street to play with their pension funds if those funds are actually doing rather well?
There’s nothing very subtle about this table setting. It has all the elaboration of an Edwardian dinner and just about as much relation to reality. However, once set, Moody’s and the other institutions on Wall Street, fully intend to make a meal of public employee pension funds. It does pay to know what’s on the menu, especially when the cooks are saying they want to “Serve Man.”