In 2005 Stephen Colbert coined the word “truthiness” to describe “truths we want to exist.” His invention was timely because at that moment I was contending with truthiness as practiced by the California State Teachers Retirement System (CalSTRS), to whose board I had been appointed that year. I discovered the organization was understating pension liabilities and overstating expected investment returns, a lethal combination with dangerous consequences for California’s public schools. After I encouraged the board to change those practices, an intense effort by special interests led to my removal. Later, when CalSTRS sought and received a bailout, truthiness reared its ugly head once again when the organization’s CEO was less than forthcoming about the real reasons for its deficit. Most recently, the CEO’s cover letter to CalSTRS’s latest annual report for the fiscal year ending June 30, 2015 (FY2015) indicates truthiness remains standard operating procedure in his office. Consider the following:
- First, the CEO overstates the fund’s comparative performance by comparing the actual return on a “gross” basis, which means before fees and expenses against the expected return on a “net” basis, which means after fees and expenses. As any investor in a mutual fund would know, the correct method is to compare returns on the same basis.
- Then he misleads readers about the most important pension-related factor for classroom funding, which is the growth of the unfunded pension liability. The bigger the unfunded liability, the more money to be diverted from classrooms. Mystifyingly, the CEO refers readers to an unfunded liability figure as of the preceding fiscal year, which ended nearly 18 months before the CEO’s letter. That’s the equivalent of the CEO of a bank directing stakeholders to an out-of-date book value. Sophisticated investors— such as CalSTRS, which has a vigorous corporate governance effort — know the correct method is to report all such values as of the same date.
- Then, to cover his tracks, the CEO inserts this obfuscatory disclaimer: “It is important to note that these [outdated unfunded liability] numbers are computed differently than the Net Pension Liability (NPL) amounts as defined per GASB standards in the Management Discussion and Analysis portion of this report.” Got that? Only insiders and knowledgeable analysts understand from that statement that one must visit page 76 of the annual report to learn that the FY2015 liability grew $9 billion, or more than 15 percent, as explained here.
These are not inconsequential distortions. Because CalSTRS’s unfunded liabilities accrue expensive interest, every $1 of additional liability will translate into roughly $3 of additional pension cost diverted from classrooms and others. Worse, every day of delay in revealing and addressing true sizes of unfunded liabilities boosts the cost. Truthiness already led to one bailout costing tens of billions more than would’ve been necessary had the truth been revealed and addressed earlier. And even that bailout — which boosted pension costs 100 percent, 60 percent and 28 percent for school districts, taxpayers and active teachers — employed truthiness to obscure the fact that even greater boosts are needed. More truthiness means even more delay and cost.
Truthiness doesn’t help retired teachers, who are guaranteed their pensions no matter the size and cost of unfunded liabilities, or current teachers, who would benefit if money went to salary increases instead of interest on unfunded liabilities. The most gravely injured by truthiness are future teachers and schoolchildren, whose hiring, salaries and classrooms will be crowded out by rising pension costs paying off hidden liabilities. The sooner unfunded liabilities are truthfully revealed and addressed, the better. But still CalSTRS chooses truthiness.
How do we change this behavior? Gretchen Morgenson of the New York Times might have an idea. In a recent column she suggests fining bankers instead of shareholders for bank misconduct. Like a big bank, CalSTRS is a big financial intermediary led by a CEO and board of directors whose actions affect millions but to date have personally been immune to the consequences of their actions. Food for thought.