As if the Senate Highway Bill (S. 1813) could not become more of a lumbering monster, along comes its Section 40312, which allows “pension smoothing,” an accounting trick whereby pension managers can downplay funding shortfalls by spreading losses across several years. As CEI’s Marc Scribner noted yesterday, “While this in theory reduces expenditures necessary to pay down these losses in the short-run, it exposes the government (read: taxpayers) to significant additional risk over the medium- and long-runs.”
This works out very well for unions, which can offer generous retirement benefits to their members, while passing on to future generations. For that reason, as Marc notes, “Big Labor and its allies are generally strong proponents of pension smoothing, because it allows them to claim they are fixing grossly underfunded pensions without actually fixing them.”
The Highway Bill threatens to make a bad problem worse. Section 40312 of the Highway Bill — which amends the Employee Retirement Income Security Act (ERISA), the law that regulates private sector pensions — would further remove pension investment return projections even further from reality, by expanding the range of allowable projection figures so broadly as to make them meaningless.
This provision would allow investment return rate for a given month to “be equal to the applicable minimum percentage or the applicable maximum percentage” of the average rate of return for a given fiscal year, “whichever is closest.” The problem is that the maximum-to-minimum range widens every year, starting this year at 20 percentage points, to 60 percentage points after 2015.
The schedule is as follows:
Calendar year Applicable minimum percentage Applicable maximum percentage
2012 90% 110%
2013 85% 115%
2014 80% 120%
2015 75% 125%
After 2015 70% 130%
This is essentially a license to make up numbers for income projections four years out from now.
To add insult to injury, by enacting this, Congress would be working at cross purposes with the Governmental Accounting Standards Board’s (GASB) efforts to improve pension accounting in the public sector. This week, GASB approved new standards that would require state pensions that are less than 80 percent funded to base income projections on lower — more realistic, in fact — discount rates, down from around 8 percent to the 3 to 4 percent range.
The pension underfunding shell game has gone on long enough. The last thing Congress should be doing is giving it another go round.
For more on pensions, see here.