Are Pension Liabilities Set to Explode?

Gina Chon of the WSJ reports, Gurus Urge Bigger Pension Cushion:

Government-pension problems, widely considered bad, may actually be even worse.

That is the assessment of some experts who maintain that the current rules of number crunching for state and local governments make retirement-benefit obligations seem lower than they really are.

Soon, their view may prevail. The accounting board for governments is likely to move toward changes that would increase the pension liability that local governments display on balance sheets by tens of billions of dollars.

If the modifications are approved, many already cash-strapped states and municipalities would likely have to increase the amount they are supposed to pay annually to their pension funds to help cover the shortfall.

The General Accounting Standards Board, or GASB, Norwalk, Conn., indicated the direction it was heading in board meetings in January and February.

Since then, public pension funds have been abuzz about the potential change. People familiar with the matter say it is likely those tentative decisions will be adopted. Initial recommendations will be out in June and a final decision is expected next year.

Even without GASB changes, underfunded pension systems already represent a financial problem for many states, thanks mostly to market declines, a lack of funding by governments and benefit increases.

According to a recent study by Wilshire Consulting, the average funding level of state public pension plans was at 65% in 2009, compared with 85% in 2008. Experts recommend that public pension funds maintain at least an 80% level of funding to be healthy.

The accounting changes generally focus on the entire amount of underfunding, rather than the status of a typically smaller annual contribution, and move away from using a fund’s expected investment return to calculate pension liabilities.

Twenty-seven state treasurers and 61 representatives of pension systems wrote letters to GASB opposing any changes. The opponents include some of the largest pension funds in the country, including those in California, New York State and Texas.

“This volatility and uncertainty would promote not only inconsistency in the measurement and disclosure of pension information, but also would disrupt public sector budget processes,” said the pension systems’ letter on the possible changes.

Proponents of the modifications, which include some government bond buyers, civic groups and others who use the financial information presented by local governments, say the current standards mask problems facing pension systems, and therefore, the fiscal predicaments of local governments.

“The current pension deficit disclosure standards have been professionally gamed for a long time,” said Diann Shipione, a former trustee of the pension fund for the city of San Diego who has long pushed for tougher standards in pension-fund accounting. “The GASB is now fighting to create the environment where greater clarity is the result.”

One thing GASB is looking at is how pension liabilities should be calculated. Governments normally don’t display their unfunded pension obligation as a liability on the balance sheet.

Instead, they list only the shortfall in the annual required pension contribution. As a result, states and municipalities that pay the annual contribution report zero pension liabilities. The total unfunded liability is reported in the notes section of the balance sheet