Lax governmental accounting standards that have allowed systemic underfunding of public pensions would amount to fraud were those public plans subject to laws governing the private sector, according to SEC Commissioner Daniel Gallagher.
“In the private sector, the SEC would quickly bring fraud charges against any corporate issuer and its officers for playing such numbers games,” said Gallagher. “And, we would also pursue and punish the so-called fiduciaries who recklessly seek yield to meet unrealistic accounting assumptions. We should not treat municipalities any differently.”
Gallagher’s comments were made in a May 29 address at the first Municipal Securities Regulator Summit. The SEC’s Office of Municipal Securities oversees the $3.7 trillion municipal bond market. Munis can be an important fixed-income vehicle for retirement, as the interest earned on them is tax-exempt.
Nearly three-fourths of muni bonds are held by retail investors.
Gallagher said that municipal bond issuers are misleading investors by failing to disclose the true extent of pension and other post-employment benefits (OPEB), like retiree health care obligations.
“Trillions of dollars in liabilities … are not appropriately reflected on government books, thereby seriously misleading investors about the riskiness of their investments in municipal securities,” he said.
The most optimistic estimates (often made by plan administrators) show state and local pension plans are underfunded by $1 trillion. Others believe the more accurate number is more than $4 trillion. Gallagher said that in order to fund the shortfalls, every household in the U.S. would need to pay $14,000 a year for the next 30 years.
With the most grievous shortfall — Gallagher did not name the city or state — each household in that municipality is on the hook for more than $88,000 in unfunded pension liabilities. Median income in the unnamed city is $47,000.