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In this blog I and multiple commenters have broached the subject of the suspect constitutionality of PSPRS' replacement of the old perma...

Thursday, September 13, 2012

PSPRS members: A dozen more reasons to be concerned about your pension

The Government Accounting Standards Board (GASB) issued two new rules that will dramatically affect public employee pensions.  Released on June 25, 2012, GASB Statements Nos. 67 and 68 will change how pensions like PSPRS have to report their financial condition.  This key passage come from GASB's "plain language" article (New GASB Pension Statements to Bring About Major Improvements in Financial Reporting):
To the extent that a pension plan's net position and projected contributions associated with active and inactive employees, including retirees, is expected to fully cover projected benefit payments for those individuals, the long-term expected rate of return will be used.  If there comes a point in the projections when plan net position and contributions related to active and inactive employees is no longer projected to be greater than or equal to projected benefit payments related to those employees and administrative expenses, then from that point forward a government would be required to discount the projected benefit payments using a municipal borrowing rate--a tax-exempt, high quality (an average rating of AA/Aa or higher, including equivalent ratings) 20-year general obligation bond index rate.
That's supposed to be "plain language"?  Here is a clearer explanation from Andrew Biggs of the American Enterprise Institute (The Accounting Trick that Will Haunt Public Pensions):

Under GASB' current accounting standards, state and local pensions "discount" their future benefit liabilities using the assumed rate of return on pension's assets, typically 8 percent. Discounting calculates the present value of a future payment by subtracting interest each year, something like compound interest in reverse.
In response to criticism, GASB in June proposed amended rules. Under the new standards, the current 8 percent discount rate could be applied to benefits only through the years in which the plan's assets are expected to last. Liabilities occurring in years after plan assets would be exhausted must be valued using a lower municipal bond rate.

What this means for PSPRS is that it can only use its expected rate of return on a portion of its liabilities.  Using the lower rate on the other portion will increase PSPRS' total liability and decrease its funded ratio.  We can see how much lower in this Wall Street Journal article (Is Your Pension Underfunded?).  These figures were for fiscal year 2010, but if this same 12% decrease were applied to the fiscal year 2011 funded ratio, PSPRS would have a funded ratio under 50%.  The new GASB rules will go into effect over the next two years.

The only good thing to take away from the Wall Street Journal article is that, at least, we aren't teachers in Chicago.

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