Why Public Pensions Are About To Look Less Healthy

[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.

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]

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...