Warren Buffett: Call your city council
Warren Buffett might be considered one of the world’s savviest investors, but his warnings aren’t being heeded in his own hometown. Buffett has called the public pension nightmare a “gigantic financial tapeworm” eating away at city and state finances, and he’s criticized funds for their optimistic investment assumptions. His own Berkshire Hathaway uses a modest 6 percent annual projected return on investments in its own pension funds.
But a report issued last week on pensions by the city of Omaha, which is where Buffett and Berkshire reside, assures residents that municipal pension funds are on track to eliminate their debt and return to solvency in 21 years thanks to recent modest changes in pensions. Here’s the problem: the pension funds in question use a whopping 8 percent projected annual return on investments to calculate their financial position. That vastly understates the city’s unfunded liabilities. Using Buffett’s guidelines this Platte Institute report earlier this year estimated unfunded liabilities at nearly $1 billion.
Even in the world of questionable public pension fund accounting, 8 percent is now high. Many funds, including Calpers and those operated by the state of Rhode Island, have reduced their investment assumptions below that recently, under pressure from financial experts like Buffett. As 7.5 percent, Rhode Island’s is significantly below Omaha’s, but a report by consulting firm Cheiron estimated that the state still had just a 40 percent chance of hitting that investment mark in the next 20 years. That makes’ Omaha’s odds of achieving solvency in 21 years even lower, which just about makes the report touted by the city worthless.
Omaha has traditionally had a rich pension system which includes some expensive wrinkles, including a so-called DROP (Defined Retirement Option Plan) feature which allows a worker to retire, keep working and collecting a salary while also channeling pension payments, which start even while the worker is still employed, into a fund which provides the worker with a big payout when he actually really (no kidding now) does stop working.
Omaha is one of a growing number of places that now has a tax in place to deal specifically with pension costs, a 2.5 percent restaurant meal tax. That’s to help pay down debt even as the city funnels other tax dollars into helping make its pension system seem solvent. The only problem is that paying back pension debt can be so expensive that pension systems’ like Omaha’s must still fiddle with some numbers, like investment returns.
Even having Warren Buffett as your most famous citizen isn’t enough to deter wildly optimistic pension accounting, it seems.