Pension Evasion: The Need For A Public Sector SOX
There were two keen observations contained in a May 11th Washington Post article on state and local government pension funds: 1) they are massively underfunded; and 2) the extent of the funding shortfall can’t be determined "because of the range of methods they use to make their calculations, including practices that have been barred in the private sector for decades."
State governments admit to at least a $750 billion funding shortfall while local governments also use similar accounting dodges "and face deficits that further contribute to what some investors and analysts say may be shaping up to be a massive breach of faith with a generation of public employees."
Many state governments "are taking out loans to restock their pension funds, which is akin to using a credit card to cover monthly mortgage payments. Others are passing the bill to future generations by using sunny projections of what their investments will return...." Warren Buffet has described these strategies as "accounting nonsense."
The Post explains that "public pensions have broad leeway in their accounting methods because, unlike their counterparts in the private sector, they have no federal oversight. Private pension funds were forced by regulators starting a generation ago to use far more conservative forecasts in their pension calculations... a nonprofit body called the Governmental Accounting Standards Board sets guidelines but has no power to enforce them and little incentive to confront the states and localities that finance its budget."
The federal government’s refusal to hold governmental bodies to the same accountability and disclosure standards that are mandated for the private sector does no favor to either the civil servants whose pensions are at stake or to the taxpayers who will be expected to pay for the inevitable bail outs. The federal government protected investors from unscrupulous corporate accounting through the Sarbanes-Oxley Act. Similar rigorous, enforceable financial disclosure requirements are needed to protect taxpayers from deceptive government accounting.
