Last November I wrote a post called “Pensions The Nature of the Lie.” The post described the way politicians have used the double counting of asset price bubbles and historically average rate of returns to justify retroactive pension increases for politically powerful public employee unions, and cuts in taxpayer pension funding to shift money to other interests. With the bill shifted to the less powerful, less well off others when the bubbles inevitably deflate. In the post I predicted that if the most recent asset price bubble, driven by the sub-zero interest rate policy of the Federal Reserve, did not deflate by the end of the fiscal year, the new local liar in chief City Comptroller Scott Stringer would announce how great things are based on market values. And if it did deflate, he would claim that things were still fine based on actuarial values, which do not account for short-term market moves in either direction until years later.
The bubble has not yet deflated. According to one widely accepted set of measures, it is now the third biggest bubble in history. According to another, it is the second biggest bubble in history. And right on cue, Stringer announced “New York City's pension funds ended the latest fiscal year with a record-high value of $160.5 billion…The funds, which he oversees, got a 17.4% investment return for fiscal year 2014, which ended June 30. Mr. Stringer said that was one of the strongest years for the pension funds in recent times, and the annualized rate of return for the most recent five-year period is 13.4%.” Additional commentary follows after the break.
All you need to do is compare this announcement with the announcement that will take place after the bubble deflates. And perhaps after Stinger’s crowd up in Albany pushed through a few more pension increases for those who already have the richest retirement benefits, with the resulting sacrifices to be made by those who are already worse off some time the future, the sort of policy that passes for “progressive” in the Generation Greed era. The money in the pension funds may be at a new record, but the amount they pay out soars year after year. Basically, if the rate of return is not also hugely positive year after year, tax increases and service cuts follow.
“The assumed rate of return, which is set by the city's actuary, is 7 percent” according to another article based on Stringer’s announcement. “That means that if the funds perform below that rate, the city must make up the difference with taxpayer money.” Oh but we can be sure that won’t happen. “Strong growth in our equities portfolio coupled with a diversified investment strategy have the pension funds well-positioned for the long-term. Our asset management team will continue to strive for excellent investment results in the years ahead.”
How does Stringer plan to accomplish this, given how inflated asset prices are already? Recently, the Government Accounting Standards Board has issued a new rule, requiring public pension funds to report their assets at market values. Stringer responded by going up to Albany and getting the state legislature to pass a law changing the type of investment those funds are allowed to make. Despite long-term underperformance by hedge funds and private equity, due to the high fee charged by those who manage such funds, Stringer will increase the percentage of the pension funds invested in those kinds of assets from 25.0% to 35.0%.
Hedge funds and pension funds are distinguished by their lack of legally required disclosure, accounting standards, investor protections, and market values to which announced values could be compared. They could claim, and New York City’s pension funds could report, they are worth just about anything. Years ago, when I was alarmed that New York City has started investing in these sorts of vehicles, my wife told me I was “worried over nothing.” Prudential rules about what pension funds are allowed to do would prevent more than a few percent from being invested in such things. Well, she may know prudential finance, but she doesn’t know the New York State legislature and New York’s political/union class, where the game of having people on the inside rob the future from everyone else continues without limit or shame.
So what will Scott Stringer announce has happened when the latest asset price bubble deflates? Compare with what is being said now. Fortunately, for those who think its their world and the rest of us are just living in it, most people don’t think about what happened at past point in time A when listening to what is said at current point in time B, and compare the two. Even in the internet age, when doing so has become much easier.
In the end, it doesn’t matter what purported asset values bubble up to and collapse back to. In reality, aside from facilitating certain lies and requiring shifts to other lies, the status of the city’s pension funds is unaffected. What matter is the level of income available to pay benefits, and how much those benefits cost.
How much did the payouts by the city’s public employee pension funds increase this year? How much will it increase over the next decade? And how much more would it increase if the state legislature continues to pass retroactive pension increases at the same rate of the past 20 years? And why wouldn’t they? If the cared about the consequences for ordinary people and the future, they wouldn’t have done it to begin with.
In the meantime, what is the actual cash return from all the city’s investments, in dividends, interest, rent, royalties, etc.? What percentage of the city’s the pension benefit payments is being funded by actual cash investment returns? Back in FY 2012, to take one example, the New York City Teacher’s pension system paid $4.5 billion in benefits, more than double the payouts in FY 2002 and, or course, a new record. The dividend, interest, and other investment earnings by that fund totaled just $1.3 billion, up from around $900 million in FY 2002. That means $3.2 billion in benefit payments was NOT funded by investment returns.
So how were those benefits paid for? If the pension fund sold off its assets to pay benefits, what will be left for today’s teachers (and other workers) when they are retire? And who will have to pay for their benefits then? If today’s taxpayers are being forced to pay for yesterday’s public employees, they are being forced to pay taxes with no public services in return. Despite the second or third biggest stock market bubble in history, and “record” pension funds assets. Why is that? We are being cheated, even as many priorities are not being funded.
So the asset price bubble has temporarily inflated further. So what? How much did benefit payments increase from FY 2012 to FY 2014? How much did actual cash investment returns increase from FY 2012 to FY 2014? I’ll bet cash payouts did not increase by 17.4% in FY 2014.
Let’s say, going forward, that the S&P 500 were to deflate by one third, or even by half. What would that mean, in reality, about the economy? Nothing. Stock prices are inflated relative to corporate earnings, and earnings themselves are (once again) being inflated by rising consumer debts. If stock prices were to fall, even by half or more, it would only be because they were too high to begin with, not because anything real was different in the economy. And stock prices do not fall, it will take years and years for reality to catch up with where they already are. And that cash return will be the only return the pension funds get.
If the S&P 500 were to deflate by one third, or even by half, what would that mean, in reality, for the city’s pension funds? Again, in reality, nothing. We’ve been robbed and are in big trouble right now, are paying the price and will pay even more. If asset values deflate to more reasonable levels, Stringer would merely have to come up with different lies. Everything he said and did, he will claim, had been supported by actuaries, investment advisors, and other professionals. Just as has been the case in the past, after which we have been left in the situation we are in.
And if everyone just reports them rather than asking the sort of questions I posited above, he will no doubt succeed in covering the tracks of his crowd until they have taken their booty to Florida or the grave.