Riley: GASB 68 is Here and Reports are Due
Tuesday, November 24, 2015
States and Municipalities nationwide are due to deliver Comprehensive Annual Financial Reports that for the first time will include the effects of GASB 68. This well announced accounting rule is meant to address the widespread abuse by officials purposely estimating high discount rates in order to understate pension liabilities. GASB 68 forces a more realistic accounting upon Governments who manage their own pension plans. Poorly funded Government pension plans will have less leeway to “choose” a discount rate than will well-funded pension plans. As 2015 comes to an end, some recent Op-eds and articles point to increasing concern about persistent underfunding and increasing liability.Joe Arnall, managing partner of Public Pension Consultants, LLC, writes:
$3 Trillion Municipal Pension Burden
It’s About Time:
Public Pension Reform Needs Space to Work
“The growing public pension funding crisis facing most of our cities and states leaves the important decision-making constituencies – elected officials, fund managers, and union representatives - in the precarious position of “we have to do something, but what?”
Political expediency, inefficiencies built into the pension process, and inaction are contributing to the $3 to $4 trillion unfunded liability problem now facing cities and states. Municipalities and states are also confronted with a perfect storm in which new accounting rules, sub par investment results and lack of reform have merged. “
The rest of Mr Arnall’s op-ed can be found here.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTAs Mr. Arnall points out, several Cities and States across the country have failed to improve funding ratios over the last few years, are now heading straight into extreme crisis. Also recently in the news was an excellent article in Bond Buyer by Paul Burton. The writing shows Connecticut in full scramble mode regarding pension reform.
The Connecticut Teachers Retirement System was completely delusional in using a discount rate of 8.5% that was recently lowered to 8%. Still delusional, it is lower than Providence Rhode Island at 8.25%, and higher than Rhode Island at 7.5%. All three government pension plans will be forced to recognize a lower discount rate under GASB 68 and consequently will show a significantly worse funding ratio.
Connecticut has already issued a pension obligation bond which is a sign highly correlated with approaching bankruptcy. Nutmeg State officials now considering freezing older plans and amortizing liabilities. Each of these are signs that local and States taxes are about to go much higher.
Rhode Island
While Connecticut is one of a handful of States that have a lower Funding Ratio that Rhode Island’s 57% both States are considered in “crisis” by ratings agencies and Pew Charitable Trusts. As far as underfunded Cities go Pawtucket is 39% funded and Providence is 21% funded (worst in the Nation) even before the GASB 68 effect is revealed in the coming weeks. Both the State of Rhode Island and Providence have already undergone “pension reform”. Neither will reform again before a calamity forces a fix. While Providence reform was fake and essentially illegal due to the City purposely misrepresenting its financial condition, the State reform has been through a series of court sanctioned adjustments. The States “Hybrid system” is here to stay. However that doesn’t mean RI is not in trouble and forever fixed as Raimondo famously claimed. Even before the GASB 68 recognition it’s likely that the funded ratio for the State of Rhode Island at June 30, 2015 report time approached 56% and is headed significantly lower. Two years of poor pension returns and an expensive and complex portfolio handed over to an inexperienced Treasurer have contributed mightily to a deteriorating ratio.
Pension reform in Connecticut is top of mind, but in Rhode Island there is a concerted effort to avoid the conversation. Governor Raimondo and Treasurer Magaziner have virtually given up on Providence and it’s only a matter of time before SEC investigations and receivership are headlines.
Michael G. Riley is vice chair at Rhode Island Center for Freedom and Prosperity, and is managing member and founder of Coastal Management Group, LLC. Riley has 35 years of experience in the financial industry, having managed divisions of PaineWebber, LETCO, and TD Securities (TD Bank). He has been quoted in Barron’s, Wall Street Transcript, NY Post, and various other print media and also appeared on NBC News, Yahoo TV, and CNBC.
Related Slideshow: Timeline - Rhode Island Pension Reform
GoLocalProv breaks down the sequence of events that have played out during Rhode Island's State Employee Pension Fund reform.
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