Thursday, June 19, 2014

Under-funded muni pensions exposed by new accounting rules

We have blogged extensively about the way that mayors, including Nashville's, promise big pensions to city unions, and then hide the cost of the promises with accounting "gimmicks."  For example, a high discount rate, like Nashville's 7.5%, reduces the present value of future pension promises, and reduces the amount that a city has to save for the future.

Now, the GASB (govt. acct. stds. bd.) is proposing rules that will give taxpayers visibility into what mayors are doing by forcing mayors to add promises to the balance sheets of a city and use lower, more realistic, discount rates.  The net effect seems small

According to the Center for Retirement Research at Boston College, a group of 150 public-employee pensions that were 72%-funded in 2013, meaning their assets were 72% of their obligations, would have been only 65%-funded under the revamped rules.

But for cities and states with particularly egregious accounting, the effect is likely to be much bigger.

In a related development, young people seem to be noticing that they will be stuck with the bills run up by irresponsible politicians.  Here is an advertisement aimed at Louisiana's Federal Senator:

1 comment:

  1. Interesting. Also, interesting to note that 7.5% may even be optimistic, since it is based on the forecasted interest rate trends and may not account for medical cost inflation (5%) or other factors that could significantly vary. This number also relies upon the accuracy of retirement and mortality rates, which have been proven to be unreliable.