Why Public Pensions Are About To Look Less Healthy

[travelover]

Quote:

Originally Posted by DFW_M5 I like it, but maybe you need add to item 2. as follows: Anyone that has more than me surely either stole it or came by it though unfair means or benefited from a nice big inheritance

As a trust fund baby, that fits under "what I deserve".

[Mulligan]

Just speaking generally, many of these pension funds could probably be financially sound with a few tweaks and small sacrifices from the pensioners. For example our system went from about 75% pre funded to close to 90% last year by lowering the annual COLA from CPI to 2% annually. Have a graduated system where current workers work a few months to a few years longer, and lower the multiplier for newcomers and I wouldn't be surprised if most become significantly more healthier immediately. Now the ones under 50% funded, I have no clue. My hope is that the political climate is good enough to address the issues now instead of ignoring the situation until the $ well runs dry. This scenario would not benefit the pensioner or the tax payer in my opinion.

[westcoast]

Read WSJ reporter Ellen Schultz's RETIREMENT HEIST. Pensions for many private sector workers were essentially stolen by their employers - used to fatten pensions for top executives or diverted to other purposes that increased corporate value. The fact that this happened to private sector workers is no reason to bash public sector workers - though pension spiking needs to be eliminated and the 3% at 50 for public safety employees doesn't seem sustainable.

[MichaelB]

Notwithstanding Travelover's brilliant rules this thread is headed down a troubling path.

[Htown Harry]

Quote:

Originally Posted by MichaelB Notwithstanding Travelover's brilliant rules this thread is headed down a troubling path.

I agree. Twenty-four posts in, and no one has made a direct comment on the article.

I'll give it a shot...

Hypothesis #1 - This GASB change will have minimal real consequences.

Why?

1. The choice of a unit of measure has no effect on the size of the object being measured.

2. Fitch pretty much yawned:
http://www.fitchratings.com/web/en/d...and-Locals.jsp

Quote:

GASB Rules Generally Positive for U.S. States and Locals Fitch believes two new reporting standards approved by The Governmental Accounting Standards Board (GASB) will narrow the variability of pension reporting and generally will improve comparability and transparency of pension data... The new accounting standards will modify how governments calculate and report their liability for unfunded pension obligations and the associated annual expense. Calculations under the new standard will reflect a narrower range of assumptions and will recognize changes in a more conservative manner than current standards allow. More thorough information will be available under the new standards for financial statement users, such as requirements for cost-sharing plan participants to report the same data as governments in other kinds of plans... One change that causes some concern is an actuarially calculated annual required contribution (ARC) will no longer have to be reported if the government does not fund its plan on an actuarial basis...

3. GASB got it wrong.
http://www.statebudgetsolutions.org/...cingUpdate.pdf

Quote:

page 19: GASB's revised pension accounting rules may have been designed to placate critic of their current approach without excessively angering public pension administrators, who are effectively GASB's "customers". However, these changes neither accurately measure the value of unfunded public pension liabilities nor eliminate incentives for pensions to take excessive investment risk.

Hypothesis #2 - This GASB thing is a Big Deal, because of it's impact on public opinion and, presumably, on public policy decisions

This analysis says the commonly reported (and debated) metrics will look a lot worse using the new measuring stick. That in itself will fan the flames seen in the posts above.

http://crr.bc.edu/wp-content/uploads/2011/11/slp_23.pdf

[clifp]

I think the NPR only got part of the story here. I don't know if this will be big deal or not but as somebody who's looked at the annual reports of probably a dozen pension plans as weird hobby, it will make comparing plans much easier.

Of more interest than NPR story is the GASB's press release. Which doesn't talk about the impact of smoothing investment returns. I can make a case for why it is important to do so. On the other hand, as quick and dirty way of figuring out does my pension plan have enough money. I've always suggested take the current actual plan assets and divide by the number of current retirees and the current employees and than compare the $/retiree or employee to the average benefits.

To me the important change is this one.

Quote:

Discount Rate. The rate used to discount projected benefit payments to their present value will be based on a single rate that reflects (a) the long-term expected rate of return on plan investments as long as the plan net position is projected under specific conditions to be sufficient to pay pensions of current employees and retirees and the pension plan assets are expected to be invested using a strategy to achieve that return; and (b) a yield or index rate on tax-exempt 20-year, AA-or-higher rated municipal bonds to the extent that the conditions for use of the long-term expected rate of return are not met.

Part b is something private pension plans have been required to do for years. I think is a great step in better transparency. One of the more aggravating issues in looking at public pension plans is the different assumptions. So when somebody says "The statement I got from my state public employees pension plans say it is 90% funded." While somebody else says their plan is only 70% funded." If the first plan assumes an 8.5% investment return and the second one only 6.5%. Which plan is in better shape? By using a single safe rate (muni bonds) it will be harder to fudge the numbers.


Not all standards are right, but given my choices between a less than perfect standard, and the minimal standards that Public pension operate with now, 3 cheers for the guys at the GASB.

[Htown Harry]

Quote:

Originally Posted by clifp Part b is something private pension plans have been required to do for years. I think is a great step in better transparency. One of the more aggravating issues in looking at public pension plans is the different assumptions. So when somebody says "The statement I got from my state public employees pension plans say it is 90% funded." While somebody else says their plan is only 70% funded." If the first plan assumes an 8.5% investment return and the second one only 6.5%. Which plan is in better shape? By using a single safe rate (muni bonds) it will be harder to fudge the numbers.

On the one hand, I definitely see the benefits of a common measuring tool across multiple plans.

But won't the change using annual resets to a bond index's then-current value create a whipsaw effect that will make year-to-year comparison's of a particular plan's health less meaningful?

Is GASB saying "all plans will be measured in inches for 2012, but in 2013 we'll all measure in furlongs"?

Perhaps I'm misunderstanding some of the accounting-speak in the GASB document, but it looks to me like the chosen index has moved 10% or so year-to-year for the last several years...