State and Local Pension funds About to Be Mugged by Reality

But Not to Worry – They Won’t Even Acknowledge They Have Been Hit

Along with faux turkey,  the kind where ground up turkey meat and turkey like substances are pushed together to form a ‘roll’ of turkey that is then sliced and sold as turkey, the Defined Benefit Pension Plan will rank as one of the 20^th century’s worst ideas.  No maybe its not as bad as what they did to turkey, but it is close.

State and local governments over the past decades have promised a fixed income in retirement to their employees.  These governmental units set aside sums in pension plans to provide the benefits.  Obviously it is impossible to know how much to set aside.  Just as obviously governmental officials wanting to keep taxes low will not set aside enough.

Now the Government Accounting Standards Board, the people that set out the rules for accounting for such things like pension costs are going to implement new rules.  The result, in some aspects pension accounting will move away from the fiction side of the ledger.

The new rules could hit pension plans in states like Illinois and New Jersey particularly hard, and even raise borrowing costs for certain municipalities, analysts say. "This could be the event that incites a bigger policy response than what we've seen so far," says Matt Fabian, managing director at Municipal Market Advisors, a research firm.

The exact impact of the new rules by the Governmental Accounting Standards Board isn't clear. According to researchers at Boston College, pension liabilities at 126 state and municipal pension plans would jump by roughly $600 billion, or about 18%. The estimate is based on 2010 financial data and doesn't reflect the stock market's recent rebound or moves by many U.S. states to rein in pension costs.

Now none of this is new.  Anyone who has been following this topics has know that these pension plans are woefully underfunded, and that they rely on totally unrealistic assumptions, like that their investments will earn 8% per year.  What is new is there is finally going to be some official recognition of the problem.  Not that it will make any difference.

Some pension officials said they don't plan to make drastic changes based on GASB's decision. For example, many pension officials plan on using two sets of numbers when calculating pension obligations: one for official reporting purposes and another to determine taxpayers' pension bills. GASB's new rules would allow that.

"It's an accounting change; that is all it is,'' says Andrew Pratt, a spokesman for New Jersey Treasurer's office. "New Jersey still has complete control over how the assumptions in its pension plans are set."

Yes, you are reading that correctly.  Pension officials will just keep two sets of books, a real set and a fictitious set.  The only amazing thing here is that they are so willing to admit this up front.