Texas’ Public Pensions: Underfunded Or The Latest Object Of Political Gamesmanship?
By Vince Leibowitz on Jun 27, 2007 in Texas Politics, Texas Public Policy & Taxation
This week, Texas Attorney General Greg Abbott announced that 82 of the state’s public pension plans have underfunded liabilities totaling $23 billion. To boot, he recommended a series of “reforms” to protect “taxpayer interest” and, of course, the retirees who depend upon the pensions.
Does all of that sound odd to anyone else? And I mean, odd on all levels.
First and foremost, aren’t such fiscal analysis the job of the Comptroller of Public Accounts? As poor as many may think Carole Keeton Strayhorn did her job as Texas Comptroller, I can’t fathom that she’d have completely missed a $23 billion pension deficiency. For one thing, it would have been a dynamite campaign issue for her last fall, i.e., something she could claim she’d “fix” as Governor.
Check this out on part of Abbott’s study of the pensions, though:
“Our analysis shows that there may be best practices that plans can use to help them reduce or eliminate unfunded liabilities,” Abbott said, “without burdening taxpayers or beneficiaries.”
I understand the “best practices” part possibly being something the AG would deal with, though more likely it should probably be the job of the general counsel of the Pension Review Board or, perhaps, the State Auditor. But, Abbott and his office appear to have completed an actual fiscal analysis of the pension plans.
Second, the $23 billion is alarming. Even with the downturn in the market the Bush administration has seen, it is difficult to fathom that a $23 billion deficit has cropped up that the Legislature, the Legislative Budget Board, the Texas Pension Review Board and the Comptroller of Public Accounts haven’t spoken up or done something.
Finally, check out Abbott’s key recommendations:
•Eliminate conflicts of interest between fund managers and pension board trustees and those they do business with
•Require actuaries to register with the state oversight board•Balance taxpayer interests with employer and employee interests in determining makeup of pension plan trustees
•Consider passing new laws creating civil or criminal penalties for funds that don’t file required annual reports.
Number one is, of course, quite reasonable and something we need. The others also sound reasonable and, in fact, more like reforms a Democrat would propose rather than a pro-business Republican like Abbott.
This, of course, brings up something else: what’s the purpose of all of this? The AG getting press for doing something that is really a function of the comptroller’s office and, no less, something so headline-grabbing as retiree pensions?
The answer should be obvious: it’s time to add another name to the ever-growing list of Republicans who think 2010 is “their year” to move up the ladder to higher office.
Abbott may also being trying to get ahead of the curve, in case one of these funds blows up. See this story from Bloomberg:
Banks Sell ‘Toxic Waste’ CDOs to Calpers, Texas Teachers Fund
By David Evans
June 1 (Bloomberg) — Bear Stearns Cos., the fifth-largest U.S. securities firm, is hawking the riskiest portions of collateralized debt obligations to public pension funds.
At a sales presentation of the bank’s CDOs to 50 public pension fund managers in a Las Vegas hotel ballroom, Jean Fleischhacker, Bear Stearns senior managing director, tells fund managers they can get a 20 percent annual return from the bottom level of a CDO.
“It has a very high cash yield to it,” Fleischhacker says at the March convention. “I think a lot of people are confused about what this product is and how it works.”
Worldwide sales of CDOs — which are packages of securities backed by bonds, mortgages and other loans — have soared since 2003, reaching $503 billion last year, a fivefold increase in three years. Bankers call the bottom sections of a CDO, the ones most vulnerable to losses from bad debt, the equity tranches.
They also refer to them as toxic waste because as more borrowers default on loans, these investments would be the first to take losses. The investments could be wiped out.
Fleischhacker, 45, says she doesn’t associate toxic waste with the equity tranches she’s selling. Pension funds in the U.S. have bought these CDO portions in efforts to boost returns.
Many pension funds, facing growing numbers of retirees, are still reeling from investments that went sour after technology stocks peaked in March 2000. Fund managers buy equity tranches, which are also called “first loss” portions, even though those investments are never given a credit rating by Fitch Group Inc., Moody’s Investors Service or Standard & Poor’s.
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As of March 31, the Texas teachers pension fund’s CDO investments had returned a total of 6.1 percent since December 2005, spokeswoman Juliana Fernandez Helton says. They include the fund’s $62.8 million in equity tranches, which were purchased from Credit Suisse Group, Goldman Sachs Group Inc., Citigroup and other banks.
The Texas fund also bought $10.1 million in investment-grade tranches from Merrill Lynch and RBS Greenwich Capital Markets, a unit of Royal Bank of Scotland Group Plc.
The Texas fund managers won’t put more than 1 percent of the fund’s assets into CDO investments, Helton says. They review CDO managers’ capabilities and the design of an individual CDO before making a purchase, she says.