Avoiding The Squirrel Distraction

Sometimes it’s hard to really figure out what is happening in the country.  During the glitz and glimmer of a presidential campaign, the American public, and most of the news media, is like a dog in a yard, sniffing this and that and always ready to be distracted when a squirrel goes capering by.  That’s why we focus, briefly, on stories that appear for a day and then vanish into the mists of time.

imageUnderneath that surface glitz and glimmer and the ginned-up controversies it produces, however, is the serious stuff.  It’s the stuff that harder to follow, and more boring to read.  It’s the stuff that the talking head pundits on the “news” shows don’t want to address, because they probably don’t understand it themselves and because it can’t be reduced to a funny one-liner or a clever tweet.  From time to time, though, a real journalist will tackle the serious stuff and produce an article that serious people really should read if they want to get even a glimpse of the challenges that our country is facing.

Mary Williams Walsh of the New York Times wrote one such article recently, about the American public pension system — and how its liabilities are legally, but chronically, underreported.  Told in the context of one tiny pension plan, for California’s Citrus Pest Control District No. 2, the article relates how public pension funds keep two sets of books — one that is officially reported, and one that reflects the “market value” of the pensions and that is kept hidden from the public eye.  The officially reported numbers paint a much rosier picture than the latter.

And that’s where the real problem lurks.  For California’s Citrus Pest Control District No. 2, which covers only six people, the official books showed a large surplus.  The market value books, however, showed that the pension plan in fact had a deficit — and when the plan decided to convert itself to a 401(k) plan, Calpers, the giant California public employee retirement system, required the pension to make a totally unexpected, and large, payment to satisfy the market value of its liabilities.

The different bookkeeping is all about how the pension funds discount their future payments to present value.  It’s the concept of the time value of money — that a dollar today, which can be invested and earn a rate of return, is worth more than a dollar 10 years from now.  Future payments, like those made by pension plans, always get discounted to their present value.  The key issue, though, is what interest rate you use to do the discounting.  Using smaller, more conservative rates will show a higher present value of future payments, whereas using a higher, more aggressive rate will produce a much lower present value — and perhaps even show a surplus.

In the case of the Citrus Pest Control District, the officially reported present value was calculated using the assumed annual rate of return on investments — which is 7.5 percent.  Using that discount rate showed the little pension had a large surplus.  Of course, anybody who does any investing knows that a constant, 7.5 annual percent rate of return achieved over the course of decades of pension payments would be a fantastic rate of return.  Anybody who lives through the down markets of 2008 and 2009 also knows that it’s just not a realistic, long-term assumption.

The upshot is that we’ve got a serious problem in this country with public pension funds that are terribly underfunded.  One of these days, someone is going to have to pay the piper, as Citrus Pest Control District No. 2 did.  But at the presidential debate next week, will anyone ask Hillary Clinton or Donald Trump about this important issue, which could bankrupt many of our local government entities — or will we get questions about pneumonia, hydration or whether it was wise to use the word “bomb” before knowing that a bomb was in fact used in the New York City dumpster bombings?

Look, a squirrel!

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