Public Pensions Face Wider Deficits Under Accounting Rules

Monday, 25 Jun 2012 04:32 PM

 

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State and local governments coping with years of underfunding and weak investment returns will be forced to clarify the extent of pension deficits under rules set today that will widen the gaps for some plans.

The measures adopted by the Governmental Accounting Standards Board alter methods of calculating liabilities and assets by the retirement systems. The changes will mean pensions for public workers in Illinois, New Jersey, Indiana and Kentucky have less than 30 percent of assets needed to meet liabilities, according to the Boston College Center for Retirement Research.

“We’re expecting some troubled credits to look worse,” Richard Ciccarone, managing director of McDonnell Investment Management LLC in Oak Brook, Illinois, which oversees $8 billion in municipal securities, said by telephone. “That will cause some shock and awe.”

The board voted unanimously to make the changes, starting next year, during a teleconference. States and cities rattled by the credit crisis that deepened the longest recession since the Great Depression have been pressed to put more money into their pensions and cut benefits to prevent shortfalls from leading to insolvency. The rules may provide fodder for politicians seeking to roll back government obligations to retirees.

Assumptions Vary

The magnitude of the collected unfunded liabilities ranges from $900 billion to more than $4 trillion, depending on the assumptions used to account for benefits owed decades later.

The rules are aimed at limiting accounting techniques that mask liabilities and will improve financial reporting by pensions. That will clarify the size and nature of a fund’s obligations, Robert Attmore, chairman of the Norwalk, Connecticut-based board, said today by telephone.

“We say it’s a more accurate picture of the financial position,” he said. “The new standards will provide better information. The ultimate goal is to make things more transparent.”

Long-term promises made by defined-benefit pension plans will be categorized as a liability on financial statements for the first time, to “more comprehensively and comparably measure the annual cost,” according to a statement from the board.

Annual Contributions

The new rules will remove a key tool for evaluating the health of funds, the so-called annual required contributions -- how much needs to be put in by the government responsible for a plan to maintain adequate financing, said Stephen Gauthier, director of technical services for the Government Finance Officers Association in Chicago.

“What people want to know is what do they need to do,” Gauthier said by telephone. “Are they meeting or not meeting their funding obligations?”

Pensions will still have to disclose some information about contributions that need to be made in comparison to what is actually put in over 10 years, John Pappas, a GASB spokesman, said by e-mail.

The changes may prompt governments to put away less than they should to keep retirement systems viable, while helping the case made by political opponents of public-sector unions, said Harold Schaitberger, the general president of the International Association of Fire Fighters.

‘Unfunded Liability’

“The new provisions will have the effect of increasing the unfunded liability when the actual numbers won’t change,” Schaitberger said. “It will give a view of the system that’s going to play into the hands of those -- at the risk of overstating it -- who have been waiting for this moment.”

Adding to reported liabilities means “legislators will see it and have to deal with it,” Kinney Poynter, executive director of the National Association of State Auditors, Comptrollers and Treasurers in Lexington, Kentucky, said by telephone.

“The general public will see it as a more accurate reflection of the liability that already exists,” Poynter said.

The changes represent an attempt to compromise in the debate over using projected investment returns when calculating the size of unfunded liabilities, said Alicia Munnell, the director of the Boston College center in Newton, Massachusetts.

Meet Halfway

“They think they’re trying to meet people halfway and what you’re really getting is sausage,” she said. “The numbers will change, but the reality hasn’t changed at all.”

Pensions will still be able to cut reported liabilities by assuming higher returns on invested assets, said Andrew Biggs, an analyst with the American Enterprise Institute in Washington.

As a result, he said, funds that pour money into risky investments with potentially higher payoffs will look healthier than retirement systems that play it safe.

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