Monday, February 6, 2012

Republican Joint Economic Committee Uses Worst-Ever Market Period to Cry the "Sky is Falling!"

We read with great interest a December 8 report, "States of  Bankruptcy: The Coming State Pensions Crisis" that was issued by the Republican Joint Economic Committee. We noticed several things about the author and the data used, and we hope that people will keep some things in perspective when they read the alarmist, “Sky is Falling” styled report.

Our primary reason for viewing this report as “Chicken Little” like, is the primary date of the data that was provided by the committee by Andrew Biggs, of the American Enterprise Institute. Namely, he used data for the year 2009 to calculate unfunded pension liabilities as a percent of state gross domestic product (see the page 5 chart).

As you recall, 2009 was a particularly  bleak year for the American and worldwide economies, and the GDP figures used by Biggs reflect the lows of the recession and stock markets’ collapse that started in 2008. The markets, state economies and pension fund performance records have recovered significantly since this snapshot was taken. It would have benefited the credibility of the report  if it had reflected a more representative year in terms of 'normal' economic and market activity. Choosing the bottom of a market cycle to cry the “Sky is Falling” is a bit disingenuous. What’s the data look like in 2010 or 2011, after market recoveries and opportunities for pensions’ to rely on their strong-hand style of investment portfolio management.

Even with the report's use of the worst possible GDP figures, all Texans should note that Texas pensions performed very well on a comparative basis to other states. On the chart, Texas was among the  states with  the lowest levels of unfunded liability  debts compared to GDP. This is testament to the effectiveness of  Texas' combined  state  and  local systems for  providing  defined benefits to their public sector employees and our solid economy. This is resilience, and also a signal that our systems are performing well, even during trying economic times.

It should be noted that, at the local levels in Texas, those few systems which have experienced trouble have done so as a result of their government sponsors' decisions not to adequately fund their pensions. As a result, they quickly get behind their actuarial curves and must take drastic efforts  to get caught up with  their liabilities. Obviously, this is a poor management practice. Fortunately, at the  local levels, very transparent  processes exist to  correct  such shortfalls. In the past two  years, pension systems in Austin, Dallas, and Houston have used these processes to realign their benefit promises and taxpayer commitments. These processes work wherever they’re tried. Contrary to the Joint Economic Committees’ assertion, there is no pension system or political movement in Texas that has as its intention  asking for "bailouts" from any source, either now or in the distant future.

We will continue to watch the reports that emanate from the Republican Joint Economic Committee. – Max Patterson

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