PERSPECTIVE - What was on your summer reading list?
I hope it was not the new pronouncements issued by the Government Accounting Standards Board (GASB) regarding how cities and states account for public union pension plans. The Generous Accounting Standards Board, as I refer to it, did not make a significant change in local and state government disclosures of their true pension liabilities.
After six years of research and about 400 pages of text, GASB’s statements 67 and 68 do little to provide enough meaningful information about the potential retirement costs faced by the taxpayers. The statements will force the worst of the worse, such as Illinois, to recognize a much larger liability.
That’s like throwing the zombified Walking Dead under the bus to give the appearance of taking a serious step in providing transparency. Zombies are already dead. You can throw them under a bulldozer; it doesn’t make them more dead.
That was an easy decision for the GASB board members, a majority of whom have or had day jobs with state and city governments and perhaps lack the independence to challenge their employers. Even the most ardent supporters of the status quo public pension accounting admit that Illinois and other crippled government entities are beyond hope.
The new standards still allow most pension funds to choose their discount rates when determining their pension liabilities. In other words, the sworn and civilian plans of the City of Los Angeles can wantonly throw caution to the wind and assume a 7.75% earnings assumption going forward, avoiding any consideration of risk.
The Huffington Post summarized the changes in no uncertain terms:
…GASB reforms could reveal several hundred billion more dollars in underfunding. But that small progress is overshadowed by the key reforms GASB omitted.
Currently, public pension funds make their own assumptions about their future investment returns without GASB interference. If public pensions increase the riskiness of their investments, they assume a higher rate of return. Simultaneously, pension funds use that high rate to “discount” their long-term liabilities, which artificially reduces today’s sticker price for the future costs of retiree benefits. This practice has no basis in finance or economics and encourages public pensions to make risky investments and then underestimate the amount they owe. It is the principal reason economists think they are hiding trillions of dollars in liabilities. GASB’s new standards do little to change this.
Instead, new rules effect soft changes, like requiring funds to explain their discount rates, though many already do. In 2010 the chief New York State actuary explained theirs while avoiding any meaningful financial evaluations. He might at least have heeded Warren Buffet: “I think it’s very hard to come up with a persuasive case that equities will over the next 17 years perform anything like … they’ve performed in the past 17. If I had to pick the most probable return … that investors in aggregate … would earn … it would be 6%.” Alas, New York State chose 7.5 percent.
More troubling, GASB implies it is implementing a “blended,” more responsible discount rate for plans that expect to run out of assets before they can pay all the benefits owed to workers. Some call this a “compromise.” But GASB has made sure its compromise will have little practical application.
My hopes for at least better footnote disclosure of the effects of using different discount rate assumptions were dashed by GASB’s allowing pro forma pension liabilities to be shown within +/- one point of long-term earnings assumptions. So, LACERS and LAFPP can express the impact on the pension liabilities at 6.75% or 8.75%. The former still above reason; the latter beyond belief.
Disclosure should contrast the city’s measurement of what the liability would be under the current 7.75% assumption with a risk-free rate of return (around 4% today), and a return of 6%. Analysts and interested citizens could then extrapolate a range of scenarios from this information.
There is nothing preventing the city from providing this disclosure. GASB does not limit disclosure; it only sets minimum standards.
Don’t expect mayoral candidate Wendy Greuel to go beyond the minimum. Ditto with wannabe City Controller Dennis Zine. Their mantra when it comes to public pensions is “if the public doesn’t know the risk, it can’t hurt them.”
(Paul Hatfield is a CPA and serves as Treasurer for the Neighborhood Council Valley Village. He blogs at Village to Village, contributes to CityWatch and can be reached at: [email protected]) –cw
CityWatch
Vol 10 Issue 69
Pub: Aug 28, 2012
