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A New Plan for Valuing Pensions?
Mary
Williams Walsh of the NYT reports, A
New Plan for Valuing Pensions:
The board
that writes accounting rules for states and cities has proposed a new
approach for pension disclosures that falls far short of what some
financial experts hoped, but which would still force many governments
to highlight pension shortfalls they have played down.
The current standard has come under heavy
fire from mainstream economists, who say it makes virtually all
government pension benefits look less costly than they really are.
Government officials have granted pensions to teachers,
police, judges and other public workers for years, without reflecting
the true cost, analysts say. Now the bills are coming due, and in many
cases there is not enough money set aside, adding to the fiscal
distress across the country.
Pensions are a third-rail issue
for the Governmental Accounting Standards Board, and it has been
working with great deliberation. Its pension project began early in
2006 but is nowhere near completion. Earlier this month, the board
issued a “Preliminary Views” statement,
summarizing its conclusions so far and requesting public feedback. A
new standard is unlikely to take effect until at least 2013.
Fiscal hawks have been urging the accounting board to require states
to measure their pension obligations at fair value. Corporations already
do this when they report their pension numbers to the Securities and Exchange Commission.
But state and local officials have resisted, and the Governmental
Accounting Standards Board seems to have taken their objections to
heart. Its new proposal would let them keep measuring their pension
obligations the same way as before, with one big exception.
The rule makers want to shine a bright light on the states and local
governments that routinely fail to put enough money into their pensions —
places like Illinois, New Jersey and Pennsylvania — that year after
year contribute less than their actuaries tell them they have to
contribute to their pension funds. The accounting board wants those
places to show the missing amounts on their balance sheets, not hide
them in footnotes.
Further,
instead of minimizing the shortfalls, those governments would have to
calculate the shortfalls in a way that magnifies them.
“I think they hope this will be the disciplinary tool that will get
everybody funding at the actuarial rate,” said Jeremy Gold, an actuary
and economist who served on the accounting board’s pension advisory task
force but who does not like the proposed new method. “They hope they
will be punishing the real laggards.”
He said the board’s
stated purpose was to foster correct financial reporting, not mete out
punishment.
Many states and cities will be relieved at least
that more far-reaching types of changes have been sidelined. They had
feared a shift to fair value accounting in general and especially now,
after big investment losses in 2008.
Some economists have
been trying to strip down pension numbers to present something like
fair value anyway. The most recent such study,
by Eileen Norcross of the Mercatus Center at George Mason University
and Andrew Biggs of the American Enterprise Institute,
determined that if New Jersey’s state pension system disclosed its
pension numbers at fair value, it would have a shortfall of $170
billion, instead of its reported $46 billion.
“This path is
not sustainable,” Ms. Norcross said.
Governments and their
actuaries argue that it is unfair and misleading to show them at their
worst — or at any particular point in time. States and cities, after
all, are fundamentally different from corporations — they do not do
things like acquire each other or file for Chapter 11 bankruptcy
protection.
In addition, while companies need to bring their
pension funds to a standing stop and measure them during such events,
governments never engage in such transactions, so they say there is no
reason to disclose their financial status at a single time.
“I doubt anybody’s imagination is vivid enough to imagine the merger of
states such as Kansas and Missouri, or Ohio and Michigan,” said Rick
Roeder, an actuary and consultant in San Diego, in testimony submitted
to the accounting board. “For a plan sponsor with a 50-plus-year time
horizon, today’s market value can be anything but fair.”
At
the heart of the dispute is the way governments gauge the value of the
pensions they owe future retirees in today’s dollars — a commonplace
financial calculation known as discounting. It is used to calculate
things as diverse as bond prices and mortgages.Discounting is
based on an interest rate, which is supposed to reflect the riskiness
and other attributes of the underlying asset. Current accounting rules
tell governments to use the investment return they expect over the long
term. In practice, this means most public pension funds now use about
8 percent.
Many economists
criticize this practice, arguing that 8 percent reflects a fairly high
degree of risk, though state pensions are guaranteed by law and are
therefore virtually risk free.
Standard economic theory
says they should be measured with a very low discount rate — something
much closer to the rate on Treasury bonds
than to the higher risk securities in most pension investment
portfolios. These days, many economists think the states should be
using a rate of about 4.5 percent to measure their pension
obligations.
The difference —
three or four percentage points — translates into hundreds of billions
of dollars when applied to pension obligations.
The 50
states together reported pension obligations of $3.3 trillion as of
mid-2008, and secured with assets of $2.3 trillion, according to the Pew Center on the States. But Ms.
Norcross said that if the states had to report their pension obligations
on a fair value basis, the number would have been $5.2 trillion.
What this means is that current liabilities of US public pension plans
are heavily understated because they're not calculated using the proper
discount rate, the yield on Treasury
bonds. Perhaps reporting pension obligations on a fair value
basis is too onerous, but the alternative of using a higher discount
rate based on an unrealistic long-term investment return is too generous
and will ultimately leave taxpayers on the hook. When it comes to
pension obligations, better to be safe than sorry.
»
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Does your father work?
No, he's employed by the State of _________. (fill in the blank)For the plan participants, pensions are nothing more than a form of deferred compensation. It makes no sense to defer compensation for 40 years + / - since the plan sponsor (company) may be long since dead and buried.
Ask A-Rod how his deferred compensation from the Texas Rangers is looking. Just another unsecured creditor looking at $0.20 / $1.00.
We ran some rough numbers a few days ago. The greater public sector amounts to about 20% of the workforce (pun intended). Over the next 20-years this 20% will receive over 50% of all pension income and that's generally guaranteed and paid for by the 80% of the workforce without the great royal pensions (transfer of your money to the public sector). This will cause the bankruptcy of the governments that made the promises or of the taxpayer but the end result is the same.
Leo - keep that spotlight on the pension file.
[quote]Governments and their actuaries argue that it is unfair and misleading to show them at their worst — or at any particular point in time. States and cities, after all, are fundamentally different from corporations[/quote]
Sorry, but this is a fallacious argument, ala "Red Herring" (Ignoratio Elenchi)
While it's true that States != Corporations, it does NOT follow that the proposals are "unfair!"
Yep. I noticed that too. The logic does not flow.
The logocal conclusion is that anyone with pension funds should withdraw all that they can as soon as possible (ignoring penalities, taxes) since that is better than nothing. Of course, Leo will never suggest this option, having been and remaining mainstream, his income depending upon participating in the pension scams.
Logical conclusion? And let me ask you dear lawrence, what happens when all these people withdraw their funds from public pensions? Where are they going to place their money? All your plan will do is accelerate pension poverty. The social costs of pension poverty will be enormous if we adopt your insane idea. I think it's better that US politicians rethink their game plan, bolster governance, and raise compensation to attract qualified people to run their pension funds.
Logical conclusion? And let me ask you dear lawrence, what happens when all these people withdraw their funds from public pensions? Where are they going to place their money? All your plan will do is accelerate pension poverty. The social costs of pension poverty will be enourmous if we adopt your insane ideas. I think it's better that US politicians rethink their game plan, bolster governance, and raise compensation to attract qualified people to run their pension funds.
The whole idea of evaluating pensions is based upon fiction. The questions and answers only pretain to which version of fiction is most acceptable today.
It is impossible to know what investment returns for the next 10 years, 20 years, or 50 years will be. It is impossible to know what the life span will become, but it is fairly certain to increase, unless there is a real economic meltdown and we go back to cave man lifestyles. If pensions are inflation adjusted then there is a further category of fog to be clearly seen through.
Using the govt. bond rate as the investment return does nothing to factor in a change in that rate. Portfolios holding those bonds will have a reduced face value if those rates increase, even though the income will not vary.
All kidding aside, I really think the average life span is going to get noticeably shorter in this country in the next 20 or so years.
When nobody picks up the garbage, fixes the sewers, decontaminates the muni water or comes when you phone 911, (you know, all those useless government jobs), our collective life span will take a shiv in the gut.
Failed pensions and missing Social Security payments mean that granny's not going to get her meds or maybe even her din-din. You think she's skinny now, give her a couple of months without money.
When the USSR fell, a huge number of middle aged career men found themselves out of a job, and in their minds, useless. A lot of them disappeared into the woods or into a bottle. A terrible swatch of productive people just "went away."
So with any luck at all, these silly pension problems will clear themselves up as we find fewer and fewer people collecting the checks.
its also impossible to know what's going on in the Gulf
... impossible to the true state of the economy
... impossible to know if anything is true, other than anything anyone else says but me is definately not true
... impossible to know if the sun will come up in the east. (just because it did yesterday - the past is no guide to the future)
... in short - its impossible to know anything... so just shut up and listen to me