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Teachers rally against budget cuts and a new pension plan in Springfield, Illinois, on May 6, 2009. A proposed change in accounting standards is... View Enlarged Image
For those trying to balance state and local budgets or vying for government dollars, GASB is about to become a four-letter word.
Later this month, the Governmental Accounting Standards Board plans to issue tentative accounting reforms that are expected to balloon public pension costs when they take effect, possibly in 2013.
State and local governments may just be emerging from their recession-induced funks, only to suffer another knockdown. In reality, it's a largely self-inflicted blow from approving generous retiree benefits they assumed would pay for themselves. GASB scorekeeping would result in bigger shortfalls on their financial statements, likely forcing service cuts or tax hikes.
Among the "Major Tentative Decisions" listed on GASB's Web site is one that would lower the rate of return that pensions can assume in measuring the unfunded portion of their pension debt.
Public pensions would still be able to set expected annual returns on their investments. A typical assumption now is just shy of 8%.
Pensions also use that same 8% rate to discount unfunded liabilities and figure out how much they have to invest now to fully fund their plans. In effect, pensions are crediting themselves with healthy future gains, even if they don't set aside assets to invest.
In the future, once a pension fund's assets are projected to be depleted, the fund would have to use a lower discount rate tied to a high-quality municipal bond index.
That rate might be 5% or 6%, depending on whether the municipal bond index is taxable, says pension consultant Gerard Miller.
The net result could be to raise unfunded liabilities on pension plans' books by up to 33%, Miller wrote in Governing magazine.
The other major change GASB is pushing would have public pensions pay off their unfunded liabilities over a shorter time frame in line with "the expected service lives of individual plan members."
Public pensions now have up to 30 years to amortize unfunded liabilities. But Miller figures that most public employers have work forces with an average of 12 to 15 years of service left before retirement, meaning they could have to cut the payment period by half or more.
He compares it to paying for a house with a 30-year mortgage and then being told you have to shift into a 15-year mortgage.
States Will Have To Pony Up
The combination of lower discount rate and shorter amortization could raise scheduled outlays to cover unfunded pension liabilities by 150%-200%, though it will vary widely by employer, Miller says.
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Posted By: mrtriax(340) on 6/9/2010 | 1:56 PM ET
Time to start buying property in Nevada. This thing could sink California and your Nevada property will become beach front. What an investment!
Posted By: mrtriax(340) on 6/9/2010 | 1:56 PM ET
Time to start buying property in Nevada. This thing could sink California and your Nevada property will become beach front. What an investment!
Posted By: GJB in LV(125) on 6/9/2010 | 1:44 AM ET
It's startin to look like Greece!! Just add some violent SEIU goons and there ya go!!
Posted By: bernardo(5) on 6/8/2010 | 10:20 PM ET
Its time to cut these promised pension payments to reasonable amounts.....nobody dares to suggest it...the taxpayers are being held hostage again to the unions
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