Fatal Flaw GASB 68 Wants Fixed

John G. Dickerson, financial expert and author of two new reports on government pension accounting, recently presented some alarming findings on how changes at Moody’s Investor Service and new pension accounting standards will unmask the staggering debt threatening vital community services.  The pertinent excerpt from his talk:

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Relating this to New Jersey, in 1997 the state sold $2.75 billion in Pension Obligation Bonds to balance a budget and make pensions appear funded.  That debt as amortized is owed by taxpayers and, as of 6/30/13, $7.7 billion in payments still need to be made – though using an 8% interest assumption the value of those payments drops to $4.2 billion (POB spreadsheet).  Overall, over $10 billion could be paid to investors for their $2.75 billion initial loan to the state and the pension.  As I understand it that liability appears on no books – not the state’s, not the pension’s, and not the taxpayer’s.  It’s invisible – which may be why it was incurred.

Another excerpt from the presentation on a pet peeve of mine:

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Here is the full video of the presentation:
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4 responses to this post.

  1. Posted by Joel L. Frank on March 19, 2013 at 3:20 pm

    Retirement Planner: Time to go public on flawed state pension plan

    By Stephen J. Butler

    sbutler@pensiondynamics.com

    Posted: 03/15/2013 05:00:00 PM PDT
    Updated: 03/15/2013 06:50:14 PM PDT

    Has anyone heard about the proposed national retirement plan that is gaining steam back in Washington? Or how about the recently enacted Secure Choice retirement plan (SB 1234) covering all private sector employees here in California? No?

    Let me fill you in. These new government plans would cover all workers in the private sector who are not already covered by a pension plan. When I asked who was promoting this, the answer was counterintuitive: It was the union leadership of the nation’s government employees.

    I found myself scratching my head and wondering, “Why should government employees care about their private sector counterparts?” That’s the other 83 percent of the nation’s workers who are not working for a federal, state or local government. I recall the old slogan “Workers of the World, Unite!” — but this seemed a little extreme.

    It turns out that the motive for fashioning a national-defined benefit pension plan is to undercut “pension envy” on the part of the American public. This is the voting public envious of, if not incensed by, the guaranteed pension benefits enjoyed by government workers.

    Who wouldn’t be envious of pension benefits that require a $400 annual taxpayer contribution for each $1,000 of paid government employee salary? These are the same pension payments that can start, for example, as early as age 49 and continue with inflation-indexed increases for the rest of a retiree’s life. It’s a formula
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    that would immediately bankrupt most American companies.

    Rather than confront the threat to these benefits head-on, the strategy of the public employee officials is to try an end-run by bringing the same government-funded benefit to everybody! If every working American gets a defined benefit pension, then who will complain about public service entitlements? No more pension envy if every voter has something comparable.

    Where the money would come from remains sketchy, and the funding guarantees inherent in all promised pension benefits remain a mystery. The starting point for funding sources would be the removal of the tax-deductible treatment of 401(k) and IRA deposits. If not enough, then there’s always the tax-deferred treatment of compound earnings on the $6 trillion of combined assets in these plans. (Full disclosure: My business works with 401(k) plan providers, so I could certainly see an impact if these changes happened.)

    In the battle to end “pension envy” there is no compunction about trashing the tax incentive aspects of the nation’s portable retirement plans enjoyed by more than half of all American workers. The argument for doing this is that the current voluntary plans have benefited mostly upper-income employees. Proponents trot out junk statistics that cite the low average account balances in these plans — statistics that include all participants, even those just starting to save or at least a long way from retirement.

    Meanwhile, our new California Secure Choice plan is a big deal back in Washington. As the camel’s nose in the tent, our state law sets the stage for a world in which every American worker is in a defined benefit retirement plan. While the plan now calls for a voluntary employee contribution, the goal is to make the contribution mandatory and use taxpayer dollars to create a guaranteed benefit. The hidden agenda for California’s current voluntary plan is to morph it into what will become the nation’s compulsory plan.

    The California plan looks like it would be just another 401(k) to which employees would have money invested by CalPERS and guaranteed by insurance companies. Some could elect to say, “No thank you,” but the sign up is automatic unless employees specifically opt out. An employer who does not sign up an employee (before the latter opts out) pays a $250 fine per employee.

    At a recent Washington, D.C., convention, sponsored by the National Conference of Public Employee Retirement Systems, California’s new plan was cited as being the first “win” as part of this national campaign. Sen. Tom Harkin, D-Iowa, who retires in 2014, promised to “Get this done.” Other speakers talked about providing the kind of pension for everyone “that our parents all enjoyed.” The term “pension envy” was actually part of the dialogue.

    The pressure to follow through and implement this flawed legislation is not coming from aggrieved employees who claim to have been denied access to a company retirement plan. Instead, this public employee rear-guard action and its effective political pressure on elected representatives has been solely the work of public employee unions. Their officials see this as a last desperate attempt to avoid what promises to be a reining in of benefits through the initiative

    Reply

    • Posted by Anonymous on March 20, 2013 at 3:05 pm

      First off Joel, I am not envious of those who think they will be receiving public pensions. A few at the top of the ponzi scheme will collect but I feel sorry for those publics who falsely believe that the gravy train will roll on into eternity when it is nothing more than empty promises. Lots if solid data to support this. As for tapping into private retirement plans or private savings all I can say is think Cypress! We shall see what the taxpayers have to say about this latest scheme. Let them try!

      Reply

    • Under the California plan, non-public employees would pay for the generous pensions of public employees. But public employees would not pay anything toward the less generous pensions of everyone else.

      In France, there is one public pension plan. Everyone has to work 40 years to collect. That is Not what the public employee unions would ever want, because everyone is equal. The same with a single national health care finance plan.

      Reply

  2. Posted by George on March 19, 2013 at 5:08 pm

    Pension envy? And I thought the idea was to get people to pay into the ponzi scheme with a promise of payment 30 years from now.

    In 0% interest rate world does a 401k make any sense? The tax on zero is zero, why deal with the 401k hassles for nothing?

    Reply

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