Former NYC School Chancellor Blasts Pension Accounting

(January 10, 2011) – Former New York City public school chancellor and current New Corporation executive Joel Klein is blasting public pension accounting.

In a Monday Wall Street Journal opinion piece, Klein, who left the New York school system in November to lead News Corporation’s education division, writes that while “…Bernie Madoff pretended he was getting 8% returns on his clients' investments—and he's in jail for running a Ponzi scheme,” public sector pensions see this “make-believe” as “common.”

Klein is referring to the well-known practice of assuming anywhere between 7% and 8.25% returns for public pension funds, “regardless of what the investments actually earned in the market,” he writes. Critics often target this pension accounting as illegitimately allowing states and municipalities to avoid contributing to their pension systems, which are notoriously underfunded. The recent case of the Pittsburgh pension system, which narrowly avoided having to hand their pension management over to the state, highlights the plight of such capital pools.

Klein, like other pension commentators such as financial author Roger Lowenstein, chocks this practice up to political expediency. “While irresponsible, this kind of behavior makes good political sense,” he writes. “After all, people run for office in the short run, and money spent now—rather than put aside in a pension reserve—is more likely to garner votes.”

Like for Madoff, Klein writes, the “[inevitable]… day of reckoning” for state and municipal entities from across the country has arrived. “Defined-benefit pensions helped bring the once-vibrant U.S. auto industry to its knees,” he writes, adding that “the same kind of pensions are now hollowing out public education.” While controversial, Klein’s view can be seen to be supported by recent studies, one of which predicted that New York taxpayers will have to add billions in dollars annually to their public pension systems over the next five years.

While Klein’s view is not novel, his closeness to the issue will likely give rise to further pressure on America’s public pensions, which have become a hot topic as of late with state capital limited and the economy stubbornly refusing to grow at a pace many hope for.