The Governmental Accounting Standards Board (GASB), a nonprofit based in Norwalk, Conn., released a draft of changes to pension accounting rules today that, come 2014, would have the effect of increasing the Annual Required Contribution (ARC) for practically all public pension plans and might forestall bankruptcy for many of those plans…that is, if anyone had to take them seriously.
They don’t. Governments sponsoring pensions are free to ignore any and all rules as regards funding which is why henceforth I will refer to this new set of suggestions as Governmental Accounting Standards Proposals (GASP).
GASP will fail because the more appropriate contributions that will develop will be unaffordable for most governments so they will still be ignored, Jersey-style. If you otherwise had a $3.5 billion ARC but only decided to put in $500 million then why wouldn’t you put in that same $500 million if the ARC your actuaries came back with was $4 billion and ‘legalise’ it by simply changing your law to redefine ‘full’ as 1/8th of what you were told instead of 1/7th?
It was a valiant try by the accountants but to save public pensions due consideration must be given to those who will be using their rules and the world they live in where promising what you know you can’t deliver is not only ethical but often de rigueur for election. I would propose a three step solution:
- Pass PEPTA. We need to have data on all public pension promises to grasp the full scope of the problem.
- Use more accurate real-world assumptions as to the longer life-expectancy of a population provided with lifetime health care and lower interest returns on a pool of assets that increasingly needs to be liquid. GASP made some significant improvements in this area especially in requiring prior shortfalls to be amortized quicker.
- Force the ARCs to be made perhaps by assigning a separate rating for bonding purposes based on the funded ratios of the plans that the government sponsors or, at the very least, preclude governments that don’t make their ARC from getting the highest bond rating.
Defined Benefit plans in the public sector might not be saved with these changes. In fact, I expect that when the true costs of these benefit promises are known (and really have to be paid for) we will have some genuine benefit cuts that would make public workers nostalgic for the days when only their COLAs were being stolen.
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