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.
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