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New standards could cost Wisconsin's vaunted public pension system

By   /   June 26, 2012  /   No Comments

Ryan Ekvall l Wisconsin Reporter

MADISON — Changes in pension accounting standards could reveal hundreds of billions of dollars in unreported, unfunded pension liabilities, but would inch nearer to measurements that reflect pension reality.

Such changes, however humble they may be by pension watcher standards, would hit Wisconsin’s highly touted pension system, seen by many as the shining example of public pension health.

The team at the Center for Retirement Research at Boston College projects the new accounting rules would move the Wisconsin Retirement System from 99.8 percent funded to 93.9 percent funded, which amounts to a nearly $5 billion shortfall.

The Government Accounting Standards Board, or GASB, took steps Monday to make reporting of public pension plans more transparent and more in line with private-sector accounting methods.

“The new standards will improve the way state and local governments report their pension liabilities and expenses, resulting in a more faithful representation of the full impact of these obligations,” said GASB Chairman Robert H. Attmore in a statement.

Also, unfunded pension liabilities will be reported on public employers’ balance sheets, where they previously were included in the footnotes.

The changes come amid heated debate in the pension world over how to calculate future liabilities – pension checks.

“GASB was under enormous pressure from both sides in making this decision,” said Keith Brainard, research director at the National Association of State Retirement Administrators. “There are those who wanted GASB to move completely to a risk-free discount rate. There were others, mostly representatives of public retirement plans, who wanted to continue to use the long-term rate of return on assets.”

Under the new standards, funded liabilities will continue to use the expected long-term rate of return on assets. Unfunded liabilities will move toward using a risk-free discount rate, measured by high quality municipal bonds, currently yielding 3.12 percent.

Although Attmore recognized the misrepresentation of pension obligations, critics say the board didn’t act strongly enough to address problems in pension reporting.

“I’ve been critical of both the current GASB rules and the new rules put in place,” said Andrew Biggs, economist at the American Enterprise Institute, a free market think tank in Washington, D.C. Biggs called the GASB “financially illiterate.”

“The new rules reduce the wrongness of the higher discount rate, but are economically incoherent,” he said. “The problem is they’re trying to get rid of this issue. They’ve really been criticized by economists, pension actuaries and financial accountants. If they admit they’re wrong on this, then pension plans’ liabilities go from less than $1 trillion to $4 trillion.”

Last week, Wisconsin Reporter reported the financial health of Wisconsin’s public pension system is grossly exaggerated based on private-sector accounting standards.

The Department of Employee Trust Funds, or ETF, and other media, using ETF’s actuarial assumptions, report Wisconsin Retirement System at 100 percent fully funded. Using private sector accounting standards, the system would be underfunded by some $60 billion, if measured against Treasury Bonds.

Nationally, with the new rules, pension systems move from 76 percent funded to 57 percent funded, according to the Center for Retirement Research, underscoring the public pension crisis hiding beneath the surface of accounting gimmicks.

According to the GASB, costs are supposed to be allocated when public employees are providing services, not sometime in the future — the idea being today’s taxpayers pay for today’s services. High discount rates result in lower required contributions.

Wisconsin’s pension system assumes a 7.2 percent rate of return.

“Here we are today’s taxpayers, elected officials, employees. We’re taking all the rewards and passing on the risk,” said Jeremy Gold, a public pension actuary and economist. “When we got higher returns (in the 1990s), we simply lowered tomorrow’s costs. The problem now is we’re lowering today’s costs. If the risk pans out, great. But if those risks go bad the future is going to pay for it.”

In theory, the moves by GASB should force poorly funded pension systems to reduce their discount rates, something pension actuaries like Gold have been advocating for years.

“Rates are being lowered all around the country,” Gold said. “We’re not going to see 4 percent or even 6 percent (discount rates.) One town lowered its expected return from 8.25 percent to 7.5 percent and now to 6.75 percent.

“One of the effects is, of course, instead of being 50 percent funded they went to 40 percent funded. Next they were 30 percent funded. When you’re already terribly funded, at least you’re funding levels don’t look too much worse.”

The state retirement association’s Brainard, however, says the rule changes may not result in substantive change, but confusion for policymakers, media and retirees.

“In most cases, the changes are going to result in the calculation of two sets of numbers instead of one — one to satisfy GASB, one to inform policy makers,” Brainard said. “The GASB accounting number is just that — an accounting number. It’s not a number that represents the amount in dollars the fund will require to pay its benefits.”

For that reason, Biggs said he doesn’t think the GASB rule changes will amount to much.

“I doubt it’s going to have much of an effect,” Biggs said. “I suspect pension managers will ignore it.”

Ignoring, pension watchers say, will come at the peril of taxpayers.