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Tallahassee Democrat: Herbert Whitehouse: Government needs clear objective with pensions
Friday, June 14, 2013
In the last couple of years, the LeRoy Collins Institute has been making an important point about Florida’s local government pension plans.
The point was about funding ratios — the percentage of a plan’s liabilities (obligations to pay pensions) that are covered by assets (set aside in a trust) to pay those benefits. Knowing the funding ratio of a plan, understanding the history of that ratio and having a level of confidence in where that ratio is going are all critical to the job of every skilled, diligent and prudent pension fiduciary. But by making this point, the Collins Institute elicited unprecedented criticism from Florida’s local government pension establishment, including public testimony at a hearing before the Legislature’s Government Operations Subcommittee.
My recent Social Science Research Network white paper (http://ssrn.com/abstract=2270527) makes the point (in the context of Florida’s local government pension plans) that the Collins Institute research was very important to cities and to the boards of trustees for these pension plans. The fiduciaries of local government pension plans need to move beyond simply checking off the box on what Florida’s experience shows to have been relatively meaningless, namely, whether a local government is keeping up with an Actuarial Required Contribution number.
Part of my research, building on the work of the Collins Institute, shows 10 large general employee pension plans that moved from having 100 percent of the assets needed to cover both the contributions that employees put into the plans and all the accrued liabilities for active employees to 0 percent. Yes, this is not a typo — 100 percent to 0 percent!
However, I suggest that local governments and local pension boards of trustees will now begin, for the first time, to focus on the long-established, generally accepted and very fundamental objective of assessing a pension plan’s ability to pay promised benefits. While this is a long accepted principle in the real world, it is an entirely new paradigm for local government.
But this principle is necessary in order to evaluate and position a plan’s assets. As Yogi Berra said: “You’ve got to be very careful if you don’t know where you’re going, because you might not get there.”
However, as this fundamental fiduciary practice sinks into the practice discipline of the government pension establishment, and many lawyers, investment consultants and actuaries up their game, the local government pension world will radically change for the better.
One reason we know this will happen is that government (GASB) pension accounting and financial disclosure standards have just changed. The new standards require extensive 10-year historical schedules showing, among other things, money-weighted investment rates of return and the funding ratios of the plan. The new GASB disclosures even include information on how funding ratios would change based on 1-percent changes (both up and down) in the discount rate.
The objective of pension accounting must be to “provide financial information that is useful in assessing the plan’s present and future ability to pay benefits when due.” The funding ratio that was the focus of the Collins Institute research is central to this objective.
Cities and boards of trustees must reclaim the force of these generally accepted accounting principles and objectives for taxpayers and employees.
Embrace, rather than fight, these principles. If you do, we will see transparency and accountability changes for Florida’s local government pension plans on the order of Darth Vader coming back from the dark side.