No, no, no, no, no. Whatever happened to checking the facts? Asking the tough questions? Digging a little deeper?
Today, at least one Main Street Media pundit – who is supposed to have special understanding of economics – offered his version of what really happened in Detroit. From his perspective, it’s all the fault of “the city fathers” who – he says – negotiated unsustainable retirement benefits into union contracts rather than paying their employees adequate wages over all these years.
Oooh, wow – can you feel the weight being pushed back onto our shoulders? Everybody still wants to blame union contracts. (Read Amy Traub’s excellent 2010 column “Your Mailman Didn’t Make the Economy Collapse” here.)
Check the facts, look a little deeper, and… wow! There’s the real truth. As recently as June 30, 2008, Detroit’s retirement systems were fully funded. Well, technically, the general retirement system was only 99% funded – but the Group II Police/Fire system had a 10% surplus.
Let’s see if we can remember that far back… what was going on in 2008?!?
Oh, yeah. Wall Street meltdown. During the second major recession of George W. Bush’s presidency. (Did you forget about his first recession? It started in March 2001… and he tried to cure it with tax cuts. But nobody paid much attention to the economy after 9/11.)
Here’s a look at the numbers, which I’ve taken straight from the Detroit retirement systems’ annual reports (available at http://www.rscd.org/annual.htm and http://www.pfrsdetroit.org/annual-report.aspx).
Whoa! Take a look at those fund balance dips, after the recessions of 2001 and 2008. Notice that they’re not very sharp. That’s because retirement fund actuaries use an accounting technique called “smoothing” when they value assets. When there is a sharp drop in values, the actuaries amortize that change over a period of several years. (They do the same thing here at the NH Retirement System.)
So you don’t see the full impact of the 2001 recession until 2004.
Now,let’s try to figure out just how “broke” the Detroit retirement systems really are.
Again, you need to pay attention to the actuaries’ math, here. The funding ratio depends on how the actuaries calculate future liabilities. And – at least recently – the actuarial assumptions they’ve used have been wildly unrealistic. “Significant actuarial assumptions used include … projected salary increases of 4.0 percent per year, additional salary increases of [up to] 4.9 percent per year based on merit and/or longevity, and cost-of-living adjustments of 2.25 percent per year.”
Now, let’s look at what actually happened: for instance, last July, Detroit’s police unions took a 10% pay cut.
Gotta wonder how that funding ratio would look if the actuaries had figured future liabilities using that 10% pay cut, rather than all those imagined increases.
Yeah, actuaries can calculate numbers any way they want.
And politicians and pundits can keep spouting the “truth” as they imagine it, rather than how it actually is. These days, they can win over all sorts of audiences, by blaming unions. It’s a lot easier to blame unions than Wall Street.
Truth is, we saw the effects of the stock market crash here in New Hampshire, just like they did in Detroit.
As recently as 1999, the New Hampshire Retirement System was more than 100% funded. But then the Trust Fund lost 10% of its value in the recession of 2001.
It lost another 25% of its value in the 2008 recession. In June 2007, before the Wall Street meltdown, the NH Retirement System had $5.9 billion in investments, including
• $29.7 million of stock in Citigroup, Inc.
• $23.5 million of stock in American International Group, Inc. (AIG)
• $14.0 million of bonds issued by Federal Home Loan Mortgage Corp. (Freddie Mac)
• $13 million of bonds issued by Federal National Mortgage Association (Fannie Mae)
Two years later, when the recession was in full force,
• Citigroup stock had plunged to only about 6% of its former value
• AIG stock was worth only about a penny on the dollar
• Freddie Mac and Fannie Mae had both been placed into federal conservatorship
and the anti-government pundits started getting lots of headlines attacking public employees’ pensions.
Yeah, here in New Hampshire we understand what’s happening out there in Detroit. All around the country, public employee unions are dealing with the exact same fallout from the Wall Street crash and the same “truth-or-rhetoric?” political opportunism.
There’s a reason why we talk about solidarity.
Read my Friday blog post about Detroit here.
Read yesterday’s post here.