GASB Vote Today – What it means for tomorrow

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.

17 responses to this post.

  1. Posted by Tough Love on June 25, 2012 at 11:49 am

    Looks like GASB succumb to the gutless politicians and the power of the Unions … notwithstanding that in the long run, it’s a position for which Union members will pay dearly as their Plans fail.


  2. Thanks John. And remember, those GASB “rules” and “standards” are neither. They’re really only suggestions made by a body funded and controlled by the very entrenched entities it is supposed to guide. Maybe proposed National Association of Bond Lawyers and Actuarial Standards Board guidelines will make some difference, but both are more interested in providing members cover when this all comes apart than in benefiting the common good. No one in any position of authority is doing that. Taxpayers’ pockets are being held wide open for picking. Anyone who wants to grasp the magnitude of this fiscal catastrophe should consider Wisconsin, touted by Pew as the only state pension system funded at 100% under current GASB guidelines. Actual funding is 60%, with a $55 billion unfunded liability that somebody has to pay. If Wisconsin is 60% funded, where does that put New Jersey?


  3. Posted by TREEeditor2 on June 25, 2012 at 12:54 pm

    BTW-this weeks Barron’s 6/25/2012 had an article about the various state pension funds


  4. Posted by Anonymous on June 25, 2012 at 3:22 pm

    John, you do know whether the state is going to make the 1 billion dollar pension contribution this year that Chris Christie put into law along with his pension reforms? Do know if he contributed the 500 million which according to law he was to contribute last year? Thanks


    • They probably did. But that’s 1/7th and 2/7th respectively of the ARC which is an understated amount to begin with. Plus the localities made their full ARC and there were the employee contributions so that’s another $3 billion coming in. But when you have $8 billion going out, new benefits accruing apace, and dodgy investments making up 38% of the assets, the plans are careening toward bankruptcy at break-neck speed even with those mini-contribution speed bumps.


  5. Posted by Javagold on June 25, 2012 at 4:01 pm



  6. Posted by Anonymous on June 25, 2012 at 4:18 pm

    John I am a bit confused that would answer in somewhat ambiguous fashion by saying probably. Isnt it a matter of public record? Shouldnt there be a definitive answer? Thanks. I will be surprised when the payment reaches 2 billion if the state will be able to make the payment unless they cut back elsewhere.


    • The budget for 2012 isn’t finalized though Chrisitie did in his budget address did urge the legislature to put in that 2/7th billion but I can’t say if it’s in yet.


      • Posted by Anonymous on June 25, 2012 at 4:39 pm

        Thanks, Do you know if the 1/7, approximately 500 million was put into the pension fund last year? Also wouldnt Christie veto anything the legislature puts forward that doesnt include the 2/7 contribution? Christie claimed it was law at this point.


  7. […] Here's John Bury's reaction from his own blog: […]


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  9. Posted by Al Moncrief on June 28, 2012 at 4:45 pm


    A new article addressing public pension contractual obligations has just been published in the Iowa Law Review.

    The article is available here:

    The article is 55 pages, and admittedly, I have not yet read it in its entirety; however, I didn’t want to delay in bringing those portions of the law review that bear on the case Justus v. State to your attention.

    The title of the Iowa Law Review article is: “Statutes as Contracts? The ‘California Rule’ and Its Impact on Public Pension Reform.”

    The author of the article is nationally renowned public pension law expert Associate Professor of Law, Amy Monahan. Ms. Monahan is Associate Professor and Vance K. Opperman Research Fellow at the University of Minnesota Law School.

    In her paper Associate Professor Monahan notes that the Colorado Supreme Court (and 12 other states) have adopted the “California Rule” as controlling in the establishment of contractual rights to public pension benefits.

    She describes the “California Rule” as follows, “courts have held that the statutes establishing state retirement systems created contracts between the state and employees that prohibit the state from making any detrimental changes to the benefits provided to current employees within such systems, even on a prospective basis.”

    Monahan argues that the California Rule goes too far and that states should have the right to make prospective changes to public pension plans, for example, changes to rates of accrual of pension benefits for current employees on a prospective basis.
    As we know, in SB 10-001 the Colorado General Assembly attempts a “clawback” of pension benefits (contracted retiree COLA benefits) that have already been earned. In the bill, the Colorado General Assembly attempts a retroactive taking of fully-vested, accrued, earned, contracted pension COLA benefits, and it does so prior to giving any consideration at all to the option of reducing the rate of accrual of pension benefits, on a prospective basis, for PERA pension members who possess “partially-vested” pension rights. This option of reducing the rate of accrual of pension benefits of active PERA members who have “partially-vested” pension rights is clearly a “less drastic” means of achieving the stated goals of the sponsors of SB 10-001.

    The taking of fully-vested PERA COLA benefits by the Colorado General Assembly is an outrageous, amoral, and unconstitutional attempt to take money from the pockets of elderly Colorado PERA retirees. These PERA retirees have met their obligations under the statutory PERA pension contract by making decades of uninterrupted PERA pension contributions. The Colorado General Assembly’s attempt to retroactively confiscate these contracted PERA pension benefits (and thereby force a single group of Colorado citizens, PERA retirees, to effectively subsidize Colorado state and local government in the coming decades) truly shocks the conscience.

    Associate Professor Monahan writes:

    “In many states, however, courts have held that the statutes establishing state retirement systems created contracts between the state and employees that prohibit the state from making any detrimental changes to the benefits provided to current employees within such systems, even on a prospective basis. This article examines the development of such a rule in the California courts, a rule that has been widely influential in this area of law, as evidenced by the fact that courts in twelve other states have followed the California Supreme Court’s holdings. This article demonstrates that by holding that benefits not yet earned are contractually protected, without explaining the basis for finding that such a contract exists, California courts have improperly infringed on legislative power and have fashioned a rule that is inconsistent with both contract and economic theory.”

    Addressing Colorado specifically, Monahan writes:

    “Very recently, a lower court in Colorado appeared to break from the California line of cases, which were previously endorsed by the Colorado Supreme Court.”

    (My comment: Here Monahan notes that the Denver District Court departed from established Colorado Supreme Court case law in its initial decision in Justus v. State.)

    Monahan continues:

    “In the Colorado case, the district court was considering whether the state was permitted, as part of a broad pension reform effort, to reduce the cost-of-living adjustments (“COLAs”) previously granted to retirees. The plaintiffs included individuals who had retired under Colorado’s public employee retirement system at a time when there was a guaranteed 3.5% COLA in place. This COLA had been in place since 2001. Under the California Rule, it is clear that COLA reductions could not be made once a participant entered the system. However, the Colorado District Court held that the statute granting COLAs contained no clear and unambiguous evidence that retirees were entitled to an unchanged COLA for the duration of their benefits. In further support of its conclusion, the court highlighted the fact that COLAs had previously been changed (though not to a retiree’s detriment), and therefore those in the system could have no reasonable expectation of an unchanged COLA.”

    (My comment: Note that Monahan points out that prior “changes” made to the PERA COLA did not harm PERA retirees . . . therefore those retirees could not be expected to contest such “improvements” to their contracted “automatic” PERA COLA benefit.)

    Monahan expresses her surprise at the Denver District Court ruling:

    “The court’s ruling is surprising both because the court broke from the previously endorsed California Rule, under which it is clear that detrimental changes to the benefits of current employees are only permissible where they are offset with comparable new advantages, and because the change at issue is one that could be characterized as a retroactive change to benefits, which is the type of change that invites the most scrutiny under a contract clause analysis.”

    (My opinion: Here Monahan states her “surprise” that the Denver District Court would render a decision that entirely disregards on-point, established Colorado case law . . . a decision that represents an extreme departure from public pension case law in Colorado. Further, Monahan notes that the COLA taking was a “retroactive” diminution of fully-vested PERA retiree COLA benefits, and that such a taking “invites the most scrutiny under contract clause analysis.”)

    Monahan elaborates:

    “For example, a participant who worked for the state from 2001 (when the 3.5% COLA was enacted) until 2010 (when the COLA was reduced) would have worked for nine years in exchange for the promise of a benefit that increased by 3.5% each year during retirement. If that COLA benefit is part of what an employee earns through services rendered, the change at issue in Colorado would properly be considered retroactive. The district court in Colorado at the very least implicitly disagreed with this characterization.”

    (My comment: Not surprisingly [recognizing that Associate Professor Monahan must follow public pension cases nationwide] she is unaware that the PERA COLA benefit has been an “automatic” pension COLA benefit since 1993.)


    • Posted by Anonymous on June 28, 2012 at 6:15 pm

      Well here in NJ, publics don’t have to worry about that since pensions and other retirement benefits aren’t accorded contractual status as ruled on by the NJSC and lower courts. So the N.J. UNCOLA is alive and well and will survive thanks to the foresight of the legislators at the 1947 NJ constitutional convention who specifically refused to grant publics any contractual retirement benefit rights, which was a very smart move on their part.


  10. Posted by Vincent Gabbeart on July 12, 2012 at 4:09 pm

    Did you know that factors like your age, gender, and marital status will impact your buyout from GM in their lump sum pension buyout plan? Understanding the factors involved and the impact they have on your options are crucial to making the right choice for your family. The best way to ensure you make an educated choice is to consult with a qualified financial planner. The offices of LJPR, LLC out of Troy Michigan are experienced in helping retirees navigate pension buyout options. They have put together an online video to help GM retirees understand this decision process, which you can watch by clicking There are less than two weeks remaining before the decision deadline of July 20, 2012. Schedule your appointment with a financial planner today.


    • Posted by Tough Love on July 13, 2012 at 9:28 pm

      Age…yes. Marital Status …. yes if an “option” is involved. Gender …. very unlikely as in Employee Plans Unisex mortality tables are required

      FYI … obvious ads for business don’t belong on this blog.


  11. Posted by Vincent Gabbeart on July 12, 2012 at 4:34 pm

    July 20th is almost here, and if you’re a General Motors retiree you know that means your pension plan decision time is almost up. You’ve likely heard there are risks involved, but are you aware of what those risks are? It’s been recommended since the June 1 announcement that you seek the advice of an experienced financial planner while making your pension plan decision. If you’ve yet to act on that, don’t worry – there is still time. This video was created to help retirees better understand the pension plan choices: Face July 20th with confidence; let a financial planner help you make the right pension choice.


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