The Coming Public Pension Meltdown

While the impact of the Governmental Accounting Standards Board’s (GASB) new public pension reporting requirements won’t be known for some time, some indications of its extent are already evident. In Illinois, one of the states facing the most serious pension shortfalls in the nation, the state Teachers’ Retirement System (TRS) is likely to see its already dismal 48.4 percent funded ration drop to 18.8 percent,  way beyond any hope of recovery, under the new rules, reports the Rockford Register Star.

Under the new GASB rules, underfunded pension plans –those with less than 80 percent of assets needed to pay their obligations — would have to use a lower discount rate, based on more realistic projections of future annual return on investments of 3 to 4 percent, down from the overly optimistic 7 to 8 percent many plans use today.

Of course, some pension fund managers might try to game the new rules, as a Wall Street Journal editorial recently warned, but they will find it difficult to do that if  the new GASB standard were to become part of a trend toward better accounting of liabilities. The Register Star reports:

Credit ratings agency Moody’s Investors Service is poised to start valuing pension debt using its own methodology that’s even more stringent than the new GASB standards. According to a report in Pensions & Investments, Moody’s plans to recalculate the debt in a method closer to the conservative estimates used in the private sector, which would increase Illinois’ debt from $83 billion to nearly $135 billion.

It’s not just Illinois. A recent Pew Center on the States report estimates that 34 states have funding ratios below 80 percent — though the situation is likely worse than that.

What are the policy implications of this? As state pension plans find it increasingly difficult to paper over their funding problems, many state policy makers likely will find themselves forced into enacting bold reforms, such as those in Utah and Rhode Island.

For more on public pensions, see here.