Governments Belatedly Put Pension Deficits on Their Books - Bloomberg

Governments Belatedly Put Pension Deficits on Their Books - Bloomberg
By Darrell Preston - May 9, 2012 12:01 AM ET

The Governmental Accounting Standards Board, which decides how states and municipalities must keep their books, is set to issue the new rules next month. Any decisions made so far are “tentative and subject to change,” John Pappas, a spokesman for the Norwalk, Connecticut-based organization, said by e-mail. Pensions would begin using the rules for fiscal years starting after June 15, 2013, and employers such as school districts would follow a year later.
As currently set up, the changes would force pensions and municipalities to report the portion of current and future retiree obligations that exceed projected assets as a liability on balance sheets for the first time.

Widening Gaps

The new method also may widen the gap between assets and promised benefits by applying a lower discount to the uncovered portion. The rules would tie the measure to a 30-year, AA rated municipal bond, rather than a typically higher expected investment return.
The average AA+ municipal bond yields about 4.2 percent for 30-year maturities, according to a Bloomberg Fair Value index. The Teachers’ Retirement System of Illinois has an assumed rate of annual return on assets of 8.5 percent, which is lower than its average of 9.3 percent each year during the past three decades, Dave Urbanek, a fund spokesman, said by telephone.
Under the new rules, the so-called funded ratio would fall to 53 percent from 77 percent for 126 plans, taken as a group, according to a November 2011 study from the Boston College center. The measure gauges assets as a proportion of obligations and was applied to both state and local pensions.

May Surprise Officials

“The liability will appear to be larger than it has in the past,” Cathie Eitelberg, national public-sector market director for New York-based Segal Co., a pension consultant, said in a telephone interview. “There could be some very surprised elected officials.”