New accounting rules that took full hold last year prevent governments from counting on investment returns after they’re broke, a technique that masked the scale of the debts they face as workers retire, according to a Bloomberg News analysis today. But outside of their certified books, they’re free to sideline it. “There is great confusion about the numbers and what they mean,” said Robert North Jr., former chief actuary for New York City’s pension funds. “Whatever numbers are used are dependent on how they are created, what they represent and their purpose.” The strains of America’s public pension funds have taken on renewed importance since the credit crisis, which saddled them with investment losses from which they haven’t fully recovered. By the end of 2015, state and local government retirement systems had $1.7 trillion less than they will eventually need, up from a $293 billion shortfall eight years earlier, according to Federal Reserve Board figures. Because governments typically count on investment returns of more than 7 percent a year, when they fall short of that they need to pump additional money into the funds to catch up. Such financial pressure led Moody’s Investors Service to cut Chicago’s bond rating to junk last year and threatens to exaggerate the fiscal crisis in Puerto Rico. It can also pose risks to municipal-debt investors if a government goes broke: In the major bankruptcies that followed the recession, bondholders bore deeper losses than retirees. The changes from the Governmental Accounting Standards Board were aimed at addressing concerns that states and cities were using investment-earnings forecasts to minimize the size of their unfunded debt to retirees. As a result, when putting a current value on pension obligations due far in the future, they now have to use less aggressive assumptions for the years after they run out of cash. Read more.
Tune in tomorrow as a special “Eye on Bankruptcy” program filmed live at ABI’s Annual Spring Meeting tackles issues surrounding the looming crisis in public and private pensions. Click here to register for free.
