With GASB reports now coming out showing massive liability revaluations for public pensions union-funded think tanks are scrambling to reassure the public that benefits do not need to be cut and everyone just needs to chill. Not unlike:
How relaxed people in Packerland were during the second-half collapse in Seattle is debatable as is the reasoning behind a Synopsis in Plain English put out by the National Public Pension Coalition seeking to undercut the new GASB methodology that replaced the old make-up-your-own-numbers methodology that governments had been using to get into this mess. It may work…..on anybody who doesn’t think too much on the propaganda being spewed.
“While this information will, in some cases, give the appearance that a government is financially weaker than it was previously, the reality of the government’s situation will not have changed.”
It had always been financially weaker.
Further, the new GASB standards only apply to how pension obligations are reported on financial statements and have no direct impact on how public officials decide to fund public pension system.
So New Jersey can keep skipping contributions.
The bottom line is, don’t panic. While the new financial reports will give pension opponents an excuse to declare a crisis, the reality is that very little has changed. The best way for local and state governments to provide a secure retirement for public employees is to continue to pay the actuarially required contribution.
Pension funds are invested in the stock market, and assets can fluctuate with the ups and downs on Wall Street. In the past, pension plans have “smoothed” (or averaged) market returns over a 3-5 year period to reduce the volatility of these fluctuations.
Though actuarial value always turns out to be higher than market value regardless of past history since smoothing is a euphemism for making up your own asset value.
Under the new GASB standard, however, any unfunded pension liabilities must be discounted at a different rate of return—that of high-grade municipal bonds. These bonds have achieved anywhere from 2.5 – 4.5% recently, far lower than the 7-8% that most plans currently assume. When a lower discount rate is assumed, the current year liability looks larger.
Though that interest rate should be 0% instead of 2.5%-4.5% since the money for those unfunded liabilities is not there and therefore not getting any earnings.
Anti-pension activists will use the new net pension liability as a scare tactic, claiming that taxpayers owe pensioners vast sums of money. They may use the large liability numbers to push for pension reductions, or even, elimination.
So taxpayers DO NOT owe pensioners vast sums of money? If so then why not close the plans down, make up that slight underfunding, and set up Defined Contribution plans where taxpayers won’t be able to play actuarial games to get out of paying.
This is incredibly dishonest. For most states, unfunded pension liabilities represent a manageable debt that can be paid down over time, similar to a homeowner making a mortgage payment. An initial mortgage debt of $300,000 might seem scary, but of course, the homeowner does not have to pay the bank this entire amount at once, instead paying it down monthly over 15 or 30 years. Pension debt works the same way.
Not public pension debt. Try skipping part or all of a mortgage payment (something that New Jersey has done for about 20 straight years).
Also, most systems will continue to fund their pensions and make calculations for funding the old way—reporting the actuarially required contribution, along with its liabilities and the unfunded actuarial accrued liability (UAAL). These numbers will differ from the new GASB numbers, perhaps significantly. Seeing multiple sets of pension numbers could be confusing for stakeholders, who may not necessarily understand the differences between the two sets of calculations.
Or want to understand them since it conflicts with dueling agendas – getting big benefits without anyone paying for them.