Corporate Governance

Another ?Perfect Storm? for Public Pensions?

By Jay D. Dean

There is a big accounting issue out there that demands attention between now and October.  The Governmental Accounting Standards Board (?GASB?) has proposed new discounting and expected return rules for public pension plans.  If implemented following public hearings in October, these rules would institutionalize the imposition of a single weighted average rate equivalent to that of the highest grade municipal bonds on both the assets and liabilities of public pensions.  The effect of such a device is to both lower the expected returns of public pension plans, while concomitantly increasing their present liabilities.

A perfect storm for a pension plan is where the values of the risky assets in the properly diversified pension portfolio plummet in a bear market, while interest rates also fall.  The discount rate applied to the fund?s liabilities thus goes down.  As a result, the pension fund?s liabilities rise substantially as pension fund assets fall.  Such a perfect pension storm hit in the low-rate / market bottom of 2002, for example, following the 9/11 attacks.

That storm passed.  If GASB funding rules change, the rules will be different.

GASB published its preliminary views on its web site (gasb.org) along with a news release on June 16.  An interesting comment by Dunstan McNichol (?States May Face Pension Pressure as New GASB Rules Widen Funding Deficits?) was published July 9 on Bloomberg.com.  The deadline for submitting written comments on the GASB rule change is September 17, 2010.

Full post as published by PomTalk on July 29, 2010 (boomark / email).