Honest pension liability accounting will bring needed change

Richard Rider, Chairman, San Diego Tax Fighters Richard Rider, Chairman, San Diego Tax Fighters Leave a Comment

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Posted on my blog: RiderBlog.NotLong.com

It appears that reality finally is coming to the arcane field of government pension accounting. So why should you care? Consider the following.

If (as the Dan Walters article below suggests) we start getting really serious about fully accounting for the unfunded liability of government pensions, bankruptcy can’t be far behind for many local jurisdictions.

BK or not (at this stage, I oppose BK for San Diego and most local jurisdictions), this sensible accounting step is GREAT NEWS if it becomes widely accepted. Real change will come only when it has to come.

Remember, cities and counties can go BK, but the states have no such recourse.

http://www.sacbee.com/2010/06/20/2835040/Dan-walters-pension-fund-bombshell.html

The Sacramento Bee
June 20, 2010

Pension fund bombshell could worsen budget woes

By Dan Walters

California’s fiscal pickle – state and local budgets that are many
billions of dollars out of balance – may have just gotten worse by
hundreds of billions of dollars.

The Governmental Accounting Standards Board has dropped a bombshell
with preliminary new rules that, if adopted, would force governments
to increase projections of pension liabilities by using tighter
“discount rates” – effectively, lower assumptions of pension fund
earnings.

The huge California Public Employees’ Retirement System, the
California State Teachers’ Retirement System, the University of
California Retirement System and dozens of locally managed pension
funds would no longer be able to minimize unfunded liabilities by
adopting rosy scenarios of future earnings.

Gov. Arnold Schwarzenegger, through his financial aide, David Crane,
has waged a war of words with the union-controlled Cal- PERS, alleging
that the nation’s largest public pension fund has been lowballing its
long-term liabilities.

Schwarzenegger has said he won’t sign a new state budget without
pension reforms of some kind. A few days ago, the administration
reached agreement with four state worker unions on some mild pension
changes mostly affecting new workers.

But the unions may be just playing for time, hoping that if Democrat
Jerry Brown is elected governor, the “two-tier” system will be rolled
back, as it was after Democrat Gray Davis succeeded Republican Pete
Wilson in 1999.

The governor and Crane have touted a Stanford University study
suggesting that, in calculating future pension obligations, the three
state retirement systems stop using a discount rate that’s the same as
their assumed rates of annual earnings return, 7.5 percent or higher.

The Stanford study proposes a much lower rate instead that’s based on
Treasury bills, which would mean – according to the study – the funds
are a half-trillion dollars underfunded. The accounting board wants an
approach tied to municipal bonds similar to the Stanford proposal.

This could raise the state’s unfunded liability by hundreds of
billions of dollars. The board also wants liabilities displayed more
prominently in government accounting reports – very much in the way it
wants governments to start accounting for retirees’ health care
commitments.

If adopted, the new accounting standards could be a political
game-changer by providing powerful ammunition for critics of the
status quo. Pension boards, often controlled by unions, have insisted
their systems are sound and don’t need structural change.

But pension costs have risen dramatically due to sharp increases in
benefits adopted during the Davis administration as well as
multibillion-dollar investment losses by state and local systems.
They’re hitting state and local governments as recession ravages their
budgets.

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