Get Another Opinion GAO

The Government Accountability Office released a generally upbeat report on State and Local Government Pension Plans titled

Economic Downturn Spurs Efforts to Address Costs and Sustainability

finding that “despite the recent economic downturn, most large state and local government pension plans have assets sufficient to cover benefit payments to retirees for a decade or more.”

Though there was no new information it was good to see the data collected in one place and there were some useful charts (page 11 showing the historical trend of trust assets to expenditures – 12.2 in 2009 – and page 19 on state plan changes).  My problem was with the reassuring conclusion of sustainability that was drawn, possibly because the GAO didn’t take into account, to put it bluntly:

Bad Rules: As admitted on page 6 of the report: the “federal government has not imposed the same funding and reporting requirement on state and local pensions as it has on private sector pension plans.”  Specifically, no funding rules.  No limits on how high the interest rate, how long the amortization period, how unreasonable the mortality decrement all resulting in an Annual Required Contribution (ARC) owing more to political whim than actuarial soundness.

Bad Math: Even if the ARC, using bad rules, were deposited the fatal flaw in commutation functions for underfunded plans, which I tried to explain before, guarantees erosion of funded ratios.

Bad Data: Government plans do not need to file 5500 forms and the plans that respond to questionnaires are usually not the ones with single-digit funded ratios.

Recent changes, especially the elimination of Cost-of-Living Adjustments for retirees, have indeed improved the chances for public defined benefit pensions to survive the decade but it won’t be because responsible funding practices are in place or investment earnings will make up systemic under-contributions.  If the GAO is looking to accurately portray the situation perhaps their next report should be titled:

         State and Local Government Pension Plans:

If we can take away their COLAs, we can take away it all

 

7 responses to this post.

  1. Posted by Tough Love on March 5, 2012 at 5:51 pm

    For Plans that are supposed to exist in perpetuity, having sufficient assets (which I’m assuming means TOGETHER WITH assumed contributions) “sufficient to cover benefit payments to retirees for a decade or more” is highly a high standard … but rather quite a low bar.

    Interestingly, GAO employees are member of similar Federal Plan …. just like opinions from NJ’s OLS employees, who will rarely opine in a way that might result in a reductions to THEIR OWN Plan benefits.

    Reply

  2. […] let John Bury indicate what’s wrong with the GAO report: My problem was with the reassuring conclusion of […]

    Reply

  3. Posted by Larry Littlefield on March 5, 2012 at 7:35 pm

    The plenty of money for a decade stuff shouldn’t re-assure anyone under 55.

    Reply

    • Posted by Tough Love on March 5, 2012 at 8:09 pm

      Did you note that the GAO statement did NOT say that the money would last for a decade WITHOUT USING UP the employee contributions of current ACTIVES.

      Now THAT would be fair wouldn’t it (giving THEIR contributions to current retirees) ….. what would be left for them?

      Reply

  4. Posted by muni-man on March 6, 2012 at 10:32 am

    Looks like the Fed doesn’t want to get involved in NJ’s increased pension/healthcare expense thingy. Claims no jurisdiction which is a BIGGIE – kinda blows the tail off the publics argument of constitutional protection under the Contracts clause. Not sure if this also covers the UN-COLA or not though. Good day for private sector TP’s who’ve been bludgeoned by this crap over the years.
    http://www.nj.com/news/index.ssf/2012/03/nj_public_workers_union_lawsui.html

    Reply

  5. Despite the Orwellian positive spin GAO tried to put on the report and the even worse spin DB pension parasites tried to put on the GAO spin, the report confirms worst fears. Public DB plans will require massive tax hikes, increased current employee contributions and current service cuts to pay benefits. “Sustainable for a decade or longer” means unsustainable.
    http://www.statebudgetsolutions.org/blog/detail/gao-report-buries-ugly-truth-about-doomed-public-pension-plans

    Reply

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