By Frank Keegan | State Budget Solutions
No matter what the Government Accounting Standards Board says or how grossly state and local politicians pervert new guidelines to continue looting workers’ pension funds, reality will triumph when the real reckoning comes.
Just ask the National Association of Bond Lawyers, municipal bond rating agencies and actuaries who do the calculations.
GASB this week released a “Setting the Record Straight” guide and background paper on standards that go into effect next year and in 2014 for government defined benefit pension plans.
For decades, politicians have been ignoring GASB or abusing slack in the voluntary “standards” to use workers’ pensions as a secret credit card with no limit, so they could squander taxpayer money on themselves and their pals.
Pension debt never showed up above the line in state and local government accounting, so they could pretend to obey “balanced budget” amendments and statutes while actually running up debts that exceeded $4.6 trillion in 2011 and probably at least $5 trillion now.
While doing it, they continued to raise tax rates and fees and inflict new taxes and fees.
Now in an effort to appear to force politicians to account this inexorable hidden debt accurately, GASB is suggesting that they show a fraction of it on the balance sheet in their Comprehensive Annual Financial Reports.
One thing the new GASB guidelines do is acknowledge reality by decoupling accounting of pension debt from any calculation of adequately paying it because, “… the amounts that governments will contribute to their pension plans is a public policy decision made by government officials.”
As a matter of public policy, government officials have been chronically underfunding government pensions in good times and bad for decades, so this change won’t make much difference.
For state and municipal workers, the most chilling reality acknowledged in the new standards is the fact that there is for the first time a procedure for dealing with what to do when the money runs out.
As an American Academy of Actuaries presentation on the proposed standards cited in determining pension obligation debt “… after plan net assets are projected to be fully depleted …,” should be calculated “… based on an index rate for governmental bonds of a high quality commensurate with the quality of the pension promise.”
While the quality of that pension promise is high — in the form of constitutional, statute and case law guarantees — there is no guarantee of funding, as universal past practice and court cases confirm, and GASB now admits.
Politicians don’t have to pay pensions, if they’re not in the mood.
Yet the most dangerous part of these new standards is, as economist Robert Novy-Marx documents in a recent study, that a government pension now can look better on paper “… literally by burning money.”
They burn it by plunging into riskier and riskier investments, an insane policy unique to American state and municipal pensions, as documented by a recent study that called for “drastic reform” to avoid “… significant costs to future workers and taxpayers.”
Those costs are starting to worry bond lawyers and the firms that give credit ratings to municipal bonds.
NABL and ratings agencies Moody’s, Fitch and Standard and Poor’s decided to get ahead of the latest GASB standards and come up with their own more realistic ways to figure out what is really going on with pensions.
NABL’s “Considerations” are intended “… to determine whether the pension plan has accumulated a sufficient amount of assets such that, together with future annual payments and assumed earnings on those assets, there will be funds sufficient to pay that future stream of benefit payments.”
As for bonds, the bigger the pension debt is, the lower the rating. That means taxpayers have to pick up a bigger tab when politicians borrow even more money.
According to Moody’s, its new standards “… would nearly triple fiscal 2010 unfunded actuarial accrued liabilities (UAAL) from $766 billion to $2.2 trillion.”
Since then, investments have been eating contributions even as the debt continues to grow.
According to latest Census data, taxpayers dumped almost $32 billion into the top 100 funds, representing 89.4 percent of total value, in the second quarter of this year and still the value of investments went down $57.6 billion.
Earnings for the quarter were a negative $14.2 billion, and they paid out $53.4 billion. That means in aggregate they had to liquidate assets and use contributions to pay benefits instead of investing for the future as pension plans must to keep from running out of money.
Now, no matter what GASB tries to do “Setting the Record Straight,” the crooked reality is going to come out.
In fact, the new standards actually could exacerbate the pension crisis, as Novy-Marx concludes, by making “… it difficult to interpret a plan’s GASB calculated liability” and encouraging politicians to make it look lower by burning pension money.
Frank Keegan is editor of Statebudgetsolutions.org a project of sunshinereview.org. The State Budget Solutions Project is non-partisan, positive, pro-reform, proactive and anchored in fundamental-systemic solutions. The goal is to successfully engage political journalists/bloggers, state officials and opinion leaders in a new way of thinking about state government and budgets, fundamental reforms, transparency and accountability.