This afternoon we will get new reporting standards for public pension plans as the Government Accounting Standards Board (GASB) votes on rules that would be effective in 2015. From the summaries of the proposed changes that I’ve read here are two reasons why nothing will change much and one reason why the situation may get far worse.
1) There won’t be much ‘crossover’, according to one article:
Under the new rules, experts say, most California pension systems will make little if any use of a lower “risk-free” government bond-based earnings forecast, currently about 4 percent, that causes debt to soar.
Pension systems can continue to use earnings forecasts critics say are too optimistic, now 7.5 percent for the three state funds, to offset or “discount” estimates of the cost of pensions promised current workers in the decades ahead.
But if the assets (employer-employee contributions and investment earnings) are projected to run out before all of the pension obligations are covered, the pension system must “crossover” to a lower bond-based forecast to calculate the remaining debt.
A Governmental Accounting Standards Board member told a seminar in Sacramento early this month that pension systems have a low probability of reaching the “crossover” point if employers make annual contributions determined by actuaries.
“In California that is almost always, because most of the time that’s set in statute,” said David Sundstrom, a GASB board member and Sonoma County treasurer-tax collector.
The chief actuary of the California Public Employees Retirement System, Alan Milligan, told the seminar he thinks the “vast majority” of California public pension systems will not reach the crossover point.
2) According to the New York Times:
Existing rules let thousands of cities, towns and school districts that have promised pensions to their workers go without reporting any obligations at all. As the new rules take hold, hidden local debts will become more evident.
Existing rules call for governments to spread new costs over 30 years, but many restart the 30-year countdown every year, while others simply spread their costs indefinitely, a recipe for sticking tomorrow’s taxpayers with today’s bills.
The board will also do away with the commonplace practice of “smoothing” the value of pension investments, or spreading the recognition of market gains and losses over several years. The standard actuarial practice has been used in many places as a tool for engineering pension numbers.
All logical fixes that remove three of the most common tools of deception from the public-plan actuaries’ kit and which will raise the value of unfunded liabilities by about 20% but that’s a number that will appear in a footnote. If a $53.9 billion number didn’t scare away prospective New Jersey bond-buyers then will a $64 billion number? After all it’s not as if New Jersey will be forced to pay off that liability, as we see from the next reason.
3) These rules are for reporting not for funding. At the last Enrolled Actuaries meeting the public pension sessions were all on what actuaries would do now that GASB was abnegating responsibility for setting funding recommendations. There won’t be any more ARC required for funding as GASB has washed its hands of setting funding standards for recalcitrant governing bodies that were free to thumb their noses at those standards and who, from here on, won’t even need to raise that finger.